Media deal will open the floodgates to mega-mergers

Approval given to AT&T for Time Warner was the prompt needed

Randall Stephenson, welcome to Hollywood. Nope, still sounds weird. The buttoned-up chairman and CEO of Dallas-based AT&T Inc has spent nearly four decades in the comparatively mundane telephone industry. Now, the 58-year-old is about to become one of the most powerful men in media and entertainment.

On June 12, AT&T prevailed over the US Justice Department, with US District Judge Richard Leon allowing the company to go ahead with its $109-billion takeover of Time Warner, the parent of HBO, Turner Broadcasting and Warner Bros film studio.

This has been a long road — AT&T and Time Warner agreed to the merger back in October 2016 and didn’t anticipate such resistance. But while the ruling was what the majority of us ultimately expected, the implications of the decision are suddenly palpable. Most notably, the judge imposed no conditions on the companies.

It seems we really have entered an “anything goes” merger environment.

And so, while the AT&T crew is off celebrating somewhere, the bankers for rival Comcast Corp are probably drawing up plans to exploit the ruling. (Comcast has since made a $65-billion offer for the assets 21st Century Fox has been planning to sell to Walt Disney Co.)

The court decision, in allowing a so-called vertical merger, also could be interpreted as good news for companies in other industries pursuing conglomerate-building. CVS Health Corp offered in December to buy insurer Aetna in a deal it valued at $77 billion, while Aetna’s rival Cigna Corp has since offered to acquire pharmacy-benefits manager Express Scripts, a competitor to CVS, for $67 billion. Shares of both takeover targets rose in after-hours trading following the Time Warner decision.

Price factor

There’s no point in arguing a case that’s closed, but I will say that the government’s concern about the consolidation of power in this deal and all the other transactions it may inspire was warranted. At the root of almost all mergers is a quest for more market power or, simply put, the ability to raise prices.

When Judge Leon presided over the case against Comcast’s deal to buy NBC Universal in 2011, it was clearer how the transaction could harm the media industry because it was much simpler then. It’s harder to predict the future when the present is still so messy.

Netflix’s success has spawned dozens of copycat apps. Some are like AT&T’s DirecTV Now service, a so-called skinny bundle of channels streamed over the internet that basically serves as a cheaper version of a traditional cable package. Others are like Time Warner’s HBO Now service to binge on shows like Game of Thrones. Both have lots of competition.

AT&T needed this deal to help justify an otherwise disappointing one for DirecTV three years ago. Now it will be interesting to see how the various constituents of this new media conglomerate fight for resources.

Producing content is expensive, and AT&T needs to invest in building a 5G wireless network, satisfy a dividend-hungry telecommunications shareholder crowd and pay off all the debt that comes with this deal.

Now the attention turns to Comcast and Disney and just how far they’ll take this potential bidding war for Fox. And will Verizon Communications’ new chief really sit out the consolidation? The flood gates have opened.