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This is Why AT&T Just Got Downgraded by Jefferies

Shares of telecommunications giant AT&T (NYSE:T) were falling in Thursday’s trading session after they were downgraded by Jefferies from “buy” to “hold.”

Analyst John Janedis of the firm wrote in a note to clients, “We are downgrading the stock from Buy to Hold largely on concerns related to the entertainment segment as cord shaving and spin downs continue to pressure margins.”

He added, “On the Time Warner front. We assume the deal will get approved, which could benefit the stock in the short term. However, we also think there’s risk that programming investment at both HBO and Turner will need to move higher given increased over-the-top competition, which could cap upside to the $1.5 billion of expected cost synergies.”

“Given increased competition from Netflix, Hulu, Amazon, and OTT players, ratings for traditional players remain under pressure,” the analyst wrote. Hulu is co-owned by Comcast.

“For HBO, while still the leading linear premium cable player, we think programming inflation is undeniable. When we marry the combination of competition, ratings pressure, and programming cost inflation, we think there is the potential that T/TWX management will look to increase programming spend following a review of the TV landscape once the deal closes,” said Janedis.

Janedis has also slashed his price target on the stock from $40 to $35.

AT&T’s (NYSE:T) chief financial officer, John Stephens, had said back in April, “I think we’re going to continue to see challenges in the satellite in the linear pay-TV model as we’ve talked about. We’ll continue to see real opportunities to shift to the over-the-top and continue to grow DTV NOW.”

According to the New York Times, Judge Richard J. Leon is expected to decide this week the fate of the Justice Department’s bid to block AT&T’s proposed $85 billion merger with Time Warner. All eyes are on this decision because if the Department of Justice fails to stop the merger, it will be less likely to sue other companies and their proposed deals.

Comcast is expected to soon make a bid for Twenty-First Century Fox’s media assets as it competes with Disney.

It was last month that Jefferies analyst Scott Goldman reiterated a “buy” rating on Comcast with a $50 price target.

“If the government loses, we could see more of the larger vertical deals, particularly in heavily regulated industries,” remarked John Harrison, who is the global head of media and entertainment at advisory firm EY.

Harrison added, “Even if the government wins, the rationale for transactions is going to remain intact and should supersede concerns around regulatory and political outcomes.”

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