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Buy Time Warner because there will be a bidding war for hot assets like HBO if AT&T deal is blocked: UBS

  • UBS raises its rating to buy for Time Warner shares, predicting its merger with AT&T will go through.
  • But even if the deal fails, Time Warner shareholders will win, UBS says.
Macall B. Polay | HBO

Time Warner shareholders will win even if the merger with AT&T doesn't happen, according to one Wall Street firm.

UBS raised its rating to buy from neutral for Time Warner shares, citing the importance of the company's quality assets such as HBO in a streaming world.

The Justice Department sued to block the $85 billion acquisition of Time Warner by AT&T in November, citing antitrust concerns.

"While we expect AT&T's acquisition of Time Warner to be approved, we believe this environment would make Time Warner's assets highly attractive to other media companies and internet-based competitors were the deal to be blocked," analyst John Hodulik wrote in a note to clients Monday. "Recent M&A multiples suggest little downside (and potential competitive bidding) for these assets were the deal to get rejected."

Hodulik reaffirmed his $108 price target for Time Warner shares, representing 13 percent upside to Friday's close.

The analyst noted that the Justice Department's brief said a merger between AT&T and Time Warner will lead to only a 45 cents per month increase in pay TV bills. Hodulik said the figure represents less than 1 percent of AT&T's average revenue per video subscriber.

"We also still find it difficult to understand why the DoJ believes pairing Time Warner assets with AT&T would give it any kind of scale advantage in content or distribution given the growth of digital," he wrote. "Claims in the DoJ brief that AT&T could work with Comcast to keep content off of vMVPDs [virtual multichannel video programming distributors] and use HBO against competitors do not reflect the realities of the OTT [over the top] world, in our view."

The analyst predicts the deal will close by mid-2018.

Time Warner shares are up 0.7 percent Monday.

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.

— CNBC's Michael Bloom contributed to this story.