Time Warner shares traded down towards $101 in the last two days as AT&T announced profit warnings for its upcoming quarterly report due to the increased pressure from traditional cable TV cord cutting and loss of subscribers. AT&T's stock was down to near 52 week lows of $35.70.
The merger deal between the two companies is structured such that Time Warner shareholders will receive 1. $53.75 in cash and 2. a consideration of AT&T shares based on the average price of its shares of the last 15 days of trading before the transaction closes. This kind of cash plus stock deal gives some uncertainty as to ultimately how much Time Warner shareholders can get when the deal is completed.
I had attached a table on how much Time Warner shareholders will receive depending on how much average AT&T share prices are:
|AT&T Average Share Price||Cash||AT&T Share Ratio||AT&T Share Consideration||Total Consideration|
I am putting up a bull put trade by selling $TWX $100 Jan 18 Puts and buying $TWX $97.5 Jan 18 Puts for a total risk of $2.50 per option. I sold the spread for an average of $0.50 each. If $TWX ends up above $100 by the end of Jan 18, the spread will net 20% profit for a period of about 3 months and an annualized return of about 83%.
By getting behind this trade, I am betting on AT&T share price will not get significantly lower than $33 by the time the merger close. Although the stock price of Time Warner is getting dangerous close to the strike price of the $100 put, I think as the last regulatory approvals from Brazil and DOJ comes in, both AT&T and Time Warner's stock prices will increase again. Do note that by buying the Jan 18 spread, if the merger completes before the expiry of the options, the TWX put options will be converted to adjusted T1 put options. Please see below from a statement from OCC regarding this matter:
Pursuant to Article VI, Section 11 and 11A, of OCC's By-Laws, all outstanding TWX options shall be adjusted as follows. On the business day immediately following the Effective Time of the Merger, each adjusted Time Warner Inc. contract will require the receipt or delivery of: (A) 100 times the exchange ratio (no less than 1.3 or greater than 1.437 shares) of AT&T Inc. ("T") Common Stock; plus (B) $5,375.00 cash; plus (C) cash in lieu of a fractional share of T Common Stock, if any. Premiums for the adjusted Time Warner Inc. options will continue to be calculated on the basis of a multiplier of 100, i.e., for premium and strike-price extensions, 1.00 will equal $100. The Time Warner Inc. option symbol will change to T1. [Any FLEX series that may exist will be adjusted in a similar manner to the standardized option.]
The drop in traditional cable TV subscribers, although worrying, is a national trend and the adoption of online streaming TV options had already been going on for years. AT&T is also not totally about cable TV as they also had large business and wireless business segments to buffer the effects of cord cutting. The latter two business are less prone to cord cutting. The business solution segment has always been a stable income source while the consumer shift of everything to mobile can still benefit AT&T amids heavy competition from Verizon and T-Mobile/Sprint.
The lowest point AT&T stock price reached in recent years 2012-2017 was $30.97 which will cause the maximum loss for the bull put spread. During this period, a low price of below $33 was reached for 14 of the months, while 47 months the lows never dipped below $33. I know these statistics count for nothing if the market or AT&T's conditions deteriorates but for the majority of time, AT&T managed to stay above $33 and so I am confident that this bull put spread will not produce a loss.