The drama swirling around two proposed mega-deals–one a surprise, the other a year in the making–has made binge-watchers out of the entire media business with this wild week making everyone eager to see what the next episode has in store.
Stock markets were open today on this Veterans Day observance (bond markets and many companies and schools are closed), but trading largely quieted after some volatile earlier sessions. Time Warner shares recovered, jumping 4% to $90.61 and AT&T was up less than 1% to $34.22, while Disney gained 2% to close at $104.79 and Fox lost a fraction to finish at $28.07.
Way back on Monday, word emerged of talks between 21st Century Fox and Disney about Fox selling most of its film and TV assets. While the negotiations hit a snag, reportedly over price, they could resume as both companies seek greater scale in order to stay competitive in a sector increasingly defined by tech giants. Then came an even bigger burst of news involving AT&T and Time Warner. The companies are more than a year into their plan to combine but now find their $85 billion deal tied up at the Justice Department and possibly headed for a courtroom battle. At issue: reports of a demand (subsequently denied by AT&T) that the telecom giant ditch CNN in order to win corporate approval. It all adds up to one giant cliffhanger.
“You already have a marketplace that’s already primed for deals,” one fund manager with media holdings told Deadline. “Rates are low, the economy is pretty strong, and competition is intense. So everyone wants to get scale, so they’re always looking at every scenario. So now if Time Warner somehow becomes available again, it will just kick all of that up a notch.” At the same time, though, the hitch for AT&T-Time Warner could also cast a chill. Speaking at a New York conference Thursday, AT&T boss Randall Stephenson said he suspects “a lot of people in the industry are just on pause waiting to see what happens with our deal.”
AT&T-Time Warner was thought to be a foregone conclusion about 10 days ago. The vertical transaction has been approved by all regulators except for the Justice Department, and no vertical deals have been rejected by the government for decades, amplifying the surprise at this latest twist.
When Makan Delrahim was a law professor, before he joined the DOJ as head of its antitrust division, a Canadian TV network asked him for his view on AT&T-Time Warner. “I don’t see this as a major antitrust problem,” he said. Now, as an appointee of President Donald Trump, he has apparently changed his view. The question of why remains a mystery, though reportedly the DOJ worries about the sheer scale of the deal and the risk that the combined entity could unfairly use its distribution power to disadvantage competitors making deals to carry HBO or Turner’s networks.
The Trump factor is significant, of course, as the president has pilloried CNN repeatedly over the past two years and also spoke out against the deal after it was announced. The reasons for his objections, in terms of regulatory philosophy, were opaque especially given the explicit pro-merger bent of Trump’s FCC Chairman, Ajit Pai, a Ronald Reagan acolyte who speaks of deregulation with nearly religious fervor. Pai is poised to ease the path of Sinclair Broadcast Group as it looks to close its closely watched acquisition of Tribune Media, with a landmark FCC vote on rule changes set for Nov. 16.
For his part, Stephenson emphatically insisted Thursday that not only would he never sell CNN, but that he had never been asked to do so. “One of the key benefits of putting these companies together is to stand up a new advertising capability,” he said, adding that voluntarily de-layering “borders on the comical.” He said several potential buyers had called to express interest–one of those, Reuters reported, was none other than Fox executive chairman and Fox News architect Rupert Murdoch. (A person familiar with Murdoch’s strategy disputes that report, insisting he never inquired about CNN.)
Rather than a “structural remedy,” as it is known in regulatory parlance, forcing the divestiture of large chunks of Time Warner, most expected a “behavioral remedy” along the lines of what Comcast accepted in order to close its acquisition of NBCUniversal–a set of conditions, essentially, requiring it to behave fairly in the marketplace given its control of extensive distribution and content assets.
If the DOJ insists on a structural remedy and AT&T refuses to comply, the matter will end up in court. Most observers predict a win for AT&T, but the process could unfold over several months, leaving the prospects uncertain. Next April 22, the companies can abandon the deal, though Time Warner would bear a higher portion of the breakup fees, Stephenson said.
Media players looking at Fox-Disney or other potential mergers–whether it’s Apple buying Disney, as is rumored, Verizon rekindling its stated interest in buying a traditional media company, or Fox launching a second bid for Time Warner, which rebuffed it in 2014–the outcome of AT&T-Time Warner will have a major impact. Discovery says it will close its $14.6 billion acquisition of Scripps Networks Interactive in early 2018. The only other major deal under review is Sinclair-Tribune, which has momentum but also some unlikely opponents in right-leaning media figures like Trump confidant Chris Ruddy, who runs conservative media company Newsmax. And while the FCC appears keen to sign off, one wonders where the DOJ will net out given the left turn it took this week.
Veteran analyst Rich Greenfield of BTIG sees the maneuvering as just so many deck chairs being moved on the Titanic. “It is becoming increasingly obvious that the legacy media sector has entered secular decline as cord-cutting/cord-shaving/cord-nevering accelerate and television advertising is finally running out of steam as dollars shift more rapidly to digital,” he wrote in a blog post this week. “Consumer behavior is changing at a rate that no legacy media company is prepared to deal with and decades of over-earning are being disrupted by the Internet. As headwinds rise, we believe the only way to maximize shareholder value is to sell as Time Warner and Scripps have both set in motion.”
The only question, then, is who’s still a buyer.
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