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The US Vs. AT&T-Time Warner: Inside The M&A Trial Of The Decade

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The US Vs. AT&T-Time Warner: Inside The M&A Trial Of The Decade
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AT&T Inc. (NYSE: T) will face off against the U.S. Department of Justice Monday in a six- to eight-week trial determining the fate of its Time Warner Inc (NYSE: TWX) acquisition.

Judge Richard Leon announced March 15 that opening arguments will begin Wednesday following two days of hearings.

What’s Happened So Far

The merger agreement was first announced in October 2016 and quickly drew heat from political powers. President Donald Trump, an outspoken opponent of Time Warner’s CNN, soon denounced the deal.

"As an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few," Trump said during his election campaign.

In initial talks, Trump’s DOJ allegedly directed AT&T to divest CNN to ensure the deal’s passage, but AT&T declined.

The DOJ then sued to block the merger in November 2017, reportedly concerned AT&T would force rival distributors to pay more for Time Warner’s content and the combined entity would prove anti-competitive.

AT&T then appeared to test disparate strategies to get its way.

First, the firm attempted to curry favor with the Trump Administration by distributing its tax reform savings as employee bonuses. (At least, that’s how some analysts interpreted it.)

When that didn’t work, it claimed it had been targeted for the lawsuit and requested White House-DOJ communication records regarding the merger. Leon denied the request in February and ruled that the firm had not made “credible showing” it had been singled out.

Related Link: Stock Roundup: Loop Capital Markets Assesses The Media, Entertainment Space

What Could Happen

Since the lawsuit was first announced, a number of Street analysts have weighed in with predictions of AT&T’s ultimate follow-through.

“While we are not lawyers or antitrust experts, we believe it will be a challenge for the DOJ to prove these [antitrust] claims, and the burden of proof is on the government,” Rosenblatt Securities analyst Alan Gould wrote in November.

In his estimation, a few factors lie in AT&T’s favor: HBO’s status as a standalone service; the Turner networks’ availability on AT&T, DIRECTV, DIRECTV Now, Sling, Sony Corp (ADR) (NYSE: SNE)’s PlayStation Vue and Hulu; and the combined entity’s small market cap relative to Facebook Inc (NASDAQ: FB), Apple Inc. (NASDAQ: AAPL) and Alphabet Inc (NASDAQ: GOOGL)(NASDAQ: GOOG).

Others simply see AT&T operating within regulatory guidelines.

“While we appreciate history is against T in this fight, based on our legal contacts take, we still very much believe case law is on T's side,” Wells Fargo analyst Jennifer Fritzsche wrote in February.

KeyBanc Capital Markets analysts professed similar optimism tempered by uncertainty.

“We continue to believe precedent favors a positive outcome for T/TWX, and believe the deal is more likely than not to be completed,” they wrote in February. “However, the administration appears to have shifted its view on the effectiveness of behavioral remedies in vertical mergers, which heightens risk. It is unclear how Judge Leon will perceive arguments at this point, as court documents to date provide little evidence of opinion.”

Why It Matters

If the DOJ wins, this would be the first vertical merger blocked in decades. The deal appears to be fairly standard and of the type generally approved, and AT&T, itself, called the lawsuit "a radical and inexplicable departure from decades of antitrust precedent."

"We see no legitimate reason for our merger to be treated differently," the company said in an early statement.

Michael J. Santorelli, director of the Advanced Communications Law and Policy Institute at New York Law School, wrote in a New York Times column that the buyout makes sense in the current media environment witnessing the rise of Netflix, Inc. (NASDAQ: NFLX) and Amazon.com, Inc. (NASDAQ: AMZN).

But some experts disagree. Harvard Law School professor Susan Crawford wrote in a November Wired column that the government is right to interfere considering the “pernicious consequences” of the Comcast Corporation (NASDAQ: CMCSA)-NBCUniversal deal and the parties’ expressed antitrust intentions.

“The DOJ uses quotes from AT&T’s and DirecTV’s own internal documents to show that the merged company intended to use Turner’s top-rated, widely distributed content as a sledgehammer both (a) to raise prices for any other competing video distributor, so as (ultimately) to drive those distributors’ customers into AT&T’s arms, and (b) to slow competition from online video,” Crawford wrote.

However, others worry the deal’s blocking is personally or politically motivated, a product of “Trump’s intimidation factor,” as NPR explored. The DOJ has said neither Trump nor politics have had any influence over the investigation, but if it’s wrong, the circumstance may set a precedent for retaliatory blockings of high-profile deals in the future.

UBS analysts said the outcome could affect the deals Comcast and Walt Disney Co (NYSE: DIS) have been negotiating with Twenty-First Century Fox Inc (NASDAQ: FOXA).

Image credit: Luismt94 (Own work) [CC BY-SA 4.0 ], via Wikimedia Commons

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