AT&T-Time Warner verdict consequential
A federal judge will rule today on whether the U.S. can block the merger; if it goes through, expect a cascade of similar activity.
Disney’s offer to buy 21st Century Fox. CVS’ bid for Aetna. T-Mobile’s proposed merger with Sprint.
The path for these blockbuster deals and others could be transformed in an instant today, when a federal judge is expected to issue his opinion on the government’s effort to block AT&T’s merger with Time Warner. It is one of the most influential antitrust cases in decades, enthralling Hollywood, Silicon Valley and Madison Avenue.
If the merger is blocked, some executives are likely to slim down their deal aspirations. If the deal ends up going through, expect a cascade of mergers and acquisitions.
“It could have a collateral effect on every other transaction,” said Blair Levin, an adviser to New Street Research and a former chief of staff at the Federal Communications Commission.
The Justice Department suit to stop AT&T from buying Time Warner, an $85.4 billion deal, surprised investors and antitrust experts when it was filed late last year. The two companies are in related industries but do not produce competing products — one makes media content, and the other distributes it. Deals between such companies, called vertical mergers, typically pass regulatory scrutiny with minimal roadblocks.
During a six-week trial at the U.S. District Court in Washington, the Justice Department argued that the merger would hurt consumers because the combined company could have the power to raise prices and squash upstart rivals. AT&T and Time Warner said the deal was necessary to compete with fast-growing streaming video giants like Netflix and Amazon.
The case will be decided by Richard J. Leon, a plain-spoken judge appointed by President George W. Bush. He is expected to give a shortened version of his opinion in remarks around 4 p.m. today. The full opinion, released around the same time, could be more than 200 pages and will be closely read.
Although Leon has given few clues about his thinking, many analysts expect the companies to prevail because of the history of similar cases that were approved.
But the decision may not be clear cut. The judge may allow the merger with several conditions, such as restrictions on how AT&T negotiates with rival cable companies that want to run Time Warner content.
“Anything is possible, and the reality is that any side that loses will be appealing,” said Rich Greenfield, an analyst at BTIG Research.
About $816 billion worth of transactions in the United States were announced this year through May, according to Thomson Reuters, up 71 percent from a year earlier.
The reason: Companies need growth, and buying other companies remains one of the fastest and most effective ways to achieve it. Despite recent interest rate increases by the Federal Reserve, borrowing the vast sums of money needed for deal-making remains cheap by historical standards.
But there is little doubt that Leon’s decision will reverberate widely.
Here are potential implications of the three general outcomes:
If the deal is allowed, no strings attached
If Leon clears the way for the merger without any restrictions, expect other companies to see it as a green light for more consolidation.
Companies pursuing vertical deals, like CVS and its $69 billion acquisition of Aetna, will point to the court decision to support their case with regulators. The same goes for another health care deal, Cigna’s $52 billion offer for the drug benefits manager Express Scripts.
More upheaval in the media industry is also likely. Comcast has signaled that if the deal goes through, it will make a bid for the 21st Century Fox parts that the Walt Disney Co. is in the process of acquiring for $52.4 billion in stock. Comcast, which was rebuffed by the Fox board in the fall, largely because of regulatory concerns, said on May 23 that it was preparing a “superior all-cash offer” for the Fox assets.
If the deal is blocked
A victory for the Justice Department could encourage the department to act more aggressively on similar deals.
Makan Delrahim, the antitrust chief at the Justice Department, has been adamant that competitive concerns in mergers cannot be resolved through promises to hold back on certain anti-competitive practices. Those requirements, called behavioral remedies, are common in vertical mergers. Comcast’s merger with NBCUniversal in 2011, for example, was granted with more than 100 conditions, such as a requirement that the combined company give competitors access to its programming.
Instead, Delrahim has said the best way to resolve antitrust problems is to sell off assets. The department offered AT&T and Time Warner a settlement that would allow them to merge as long as they sold Turner Broadcasting or DirecTV. The companies rejected the proposal, leading to the suit to block the deal.
Establishing his standard as the new norm would send a chill through markets, which had become accustomed to government approval of mergers with restrictions.
If conditions are placed on a deal
Leon could also allow the deal but insist that the parties agree to certain conditions, a middle ground that could go in multiple directions.
For example, during the trial, Leon asked about promises by AT&T and Time Warner to appoint a third party to oversee disagreements between AT&T and rival cable companies over the fees to license Time Warner content. The companies have argued that arbitration would resolve concerns that AT&T could use Time Warner content like CNN, TNT and TBS as a weapon to increase costs for rivals.
The Justice Department has argued that the promises of arbitration aren’t strong enough. Analysts viewed the judge’s questions on arbitration as an area where he could find compromise and may use them to resolve competitive problems with the deal.
He may also demand divestitures like those proposed by the Justice Department. But AT&T and Time Warner would almost certainly fight such a decision in an appeal.