After a six-week trial, U.S. District Court Judge Richard Leon approved AT&T’s (T - Free Report) $85.4 billion purchase of Time Warner without any condition. This will give the pay-TV provider an ownership of cable channels such as HBO and CNN as well as film studio Warner Bros. AT&T vowed to close the deal by Jun 20.
This long-awaited decision will change the landscape of the media industry by setting the stage for mergers of media companies and telecom providers. Cable operator, Comcast Corp (CMCSA - Free Report) has also been eyeing the film production and studio assets of Twenty-First Century Fox FOXA for as much as $60 billion, should regulators approve AT&T's acquisition of Time Warner.
The expected move would create a bidding war for The Walt Disney Company (DIS - Free Report) , which struck a deal in November to acquire the same assets of Fox for $52.4 billion in an all-stock deal. The acquisition of Fox assets will enhance the streaming and television content of both Comcast and Disney and pose a significant threat to growing digital rivals like Netflix (NFLX - Free Report) and Amazon.com (AMZN - Free Report) . In fact, Comcast would become the biggest player in Hollywood by acquiring Fox (read: Comcast Might Thwart Disney-Fox Deal: Media ETFs in Focus).
Fox’s film production business includes Twentieth Century Fox, Fox Searchlight and Fox 2000, and the highest grossing Marvel movies - X-Men, Fantastic Four and Deadpool. Fox TV film studio includes This Is Us, Modern Family, and The Simpsons, regional sports networks and entertainment cable channels like National Geographic, FX Networks, Fox Sports Regional Networks, as well as international networks like Star India, a controlling stake in Hulu, and a 39% stake of European satellite provider, Sky.
The ruling has also opened doors for AT&T’s biggest rival Verizon Communication (VZ - Free Report) to bid for a media company. The potential target of Verizon is the combined CBS Corp (CBS - Free Report) and Viacom (VIAB - Free Report) . Other media stocks like Charter Communications CHTR, Dish Network (DISH - Free Report) , and Discovery DISCA are also in the spotlight in light of the merger mania.
Additionally, the verdict has spread optimism beyond the media space as well. It would aid the proposed T-Mobile/Sprint (S - Free Report) combination and a pair of significant healthcare deals. This includes the potential buyout of the nation's third-largest health insurer Aetna AET by a drug chain CVS Health Corp CVS and the largest pharmacy benefit manager Express Scripts Holding ESRX by Cigna (C - Free Report) I) (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).
How to Play?
Investors seeking to capitalize on the upcoming boom in M&A activities and potential reshaping of the media industry should consider any of the following ETFs:
IQ Merger Arbitrage ETF MNA
This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer while at the same time provides short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index. Healthcare takes the top spot at 22%, while energy and technology round off the next two spots. The product has amassed $556.7 million in its asset base and trades in average volume of around 129,000 shares a day. It charges 77 bps in annual fees (read: How to Play the Surge in Global M&A With ETFs).
ProShares Merger ETF MRGR
This product provides exposure to a global merger arbitrage strategy, which seeks to capture the spread between the price at which the stock of a company (a target) trades after a proposed acquisition of such target is announced and the value (cash plus stock) that the acquiring company has proposed to pay for the stock of the target (a spread). This can be easily done by the S&P Merger Arbitrage Index. The fund has key holdings in financials, healthcare and technology. The ETF has been able to manage assets worth $4.4 million while it sees light volume of just 1,000 shares a day.
Invesco Dynamic Media ETF PBS
PBS provides exposure to media stocks under one roof. It seeks to offer capital appreciation by investing in companies that are selected on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value by tracking the Dynamic Media Intellidex Index. The product has AUM of $49.4 million and average daily volume of 15,000 shares. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: 6 ETFs to Score High from World Cup Spending Spree).
iShares Evolved U.S. Media and Entertainment ETF IEME
This newly actively managed ETF employs data science techniques to identify companies with exposure to the media and entertainment sector. It has accumulated $5.1 million in its asset base since Mar 21. The ETF charges 18 bps in annual fees and trades in paltry volume of around 1,000 shares.
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