As Disney gets set to announce its acquisition of 21st Century Fox assets, reportedly on Thursday, Hollywood and Wall Street are swooning so much they have almost forgotten their other recent obsession: the fate of the even bigger AT&T-Time Warner deal.
The momentum of one deal just as the other one moves sideways is prompting this question: Given the formidable scale of the combined company, will the Murdoch family’s game-changing move trigger the same regulatory concerns as AT&T? And if so, what compromise would Disney need to offer in order to win approval?
The U.S. Department of Justice’s lawsuit seeking to block the AT&T-Time Warner deal will go to trial on March 19, and the trial is expected to last about two weeks. Driving the government’s case is the assertion that the scale of the company is inherently problematic–that owning both DirecTV and a massive well of content like Time Warner means the company would gouge rivals and consumers. Shedding large pieces such as CNN or DirecTV would be a “structural remedy” that would satisfy the government, but those are steps AT&T says it won’t take.
With an enterprise value of about $68B, the Disney-Fox deal would create a giant with a profile somewhat similar to AT&T-Time Warner. The deal would send Fox’s studio and cable network operations, plus stakes in key assets like Hulu and Sky TV, to Disney. Unlike the “vertical” combination engineered by AT&T, this would be a horizontal transaction, meaning it would add assets of the same kind to the same portfolio.
According to estimates by analyst Michael Nathanson of MoffettNathanson, the combined company would have controlled 40% of domestic box office in 2016 and 42% of cable affiliate and retrans fees projected for 2018. Nathanson told Deadline he has “no way to handicap” how regulators will view such consolidation. “The film overlap probably isn’t a major one, the ownership of all these networks could be,” he said.
The regulatory stance of President Donald Trump is all but impossible to pin down, unless the subject is coal. “In today’s world, it’s impossible to predict how the government is going to respond,” said Larry Hutcher, co-managing partner at Davidoff, Hutcher & Citron. “Because it’s Murdoch, are they going to treat it differently than AT&T? No one knows the answer at this point.”
One X-factor for the deal’s path through Washington is the fact that Rupert Murdoch talks frequently with Trump. Last spring, the New York Times said the two talk “almost every day,” though the White House has denied that.
Pivotal Research analyst Brian Wieser told Deadline the same defense offered by AT&T–namely, that media companies face unprecedented competition for consumer attention and dollars from tech companies like Google and Apple–should apply to Disney-Fox. “In a bad year, they’d be a quarter of domestic box office, in a good one they’d be half the market,” he said. While that heft will make exhibitors recoil, “The companies need to make the point that the premium entertainment business is broader than movie theatres. If you are an owner of a movie theatre, you wouldn’t say that. But everyone else can see that argument.”
In the sports arena, for example, where Disney would plug the $23B regional sports networks run by Fox into its ESPN flagship, some monopoly concerns could arise. “But that’s compensated by the fact that when rights deals are going to be negotiated in a few years, all of the tech companies will be bidding on rights,” Wieser said.
The proposed Disney tie-up comes as Fox is deep into regulatory review of its long-running effort to gain full control of UK pay-TV giant Sky TV. The $15.6B bid, which is being heavily scrutinized given the turmoil at Fox News and lingering concerns after the phone hacking scandal, was subjected to its latest delay last week as regulators delayed the publication of key findings from December into January. Tom Eagan, an analyst with Telsey Advisors, sees a far easier time for Disney with UK regulators than Fox has been getting, given the latter’s baggage with phone hacking and concerns about the oversight of Fox News.
Speculating about the U.S. media regulation landscape in a research note, analyst Amy Yong of Macquarie observed, “The DoJ seems less open to bigger deals, but any additional friction is somewhat offset by a friendlier FCC.” The word “friendlier” doesn’t even begin to describe the Republican-controlled FCC. Although it has not weighed in on AT&T-Time Warner because it does not revolve around broadcast assets, the FCC has spent 2017 stripping away decades’ worth of legislation and preparing to roll back net neutrality rules. On Thursday, it will be the undercard–while Disney and Fox will dominate with their expected deal announcement, FCC commissioners will be voting on net neutrality and other de-regulatory moves.
The FCC isn’t guaranteed to take up the Fox-Disney combination, however, given that the broadcast network and local TV stations are not on the table. But the DOJ’s antitrust division, led by Trump appointee Makan Delrahim, will scrutinize the deal.
“Given the exclusion of the Fox network and TV stations, the big question would probably be around the combination of the studios and the combined girth of sports affiliate fees,” Nathanson wrote in a research note puckishly titled “What the FOX Is Going On?”
Delrahim has said publicly, and the DOJ asserts in its complaint, that the Comcast-NBCUniversal deal should no longer serve as a model for antitrust regulators. The “behavioral remedies”–some 150-plus actions imposed by the government–were inherently regulatory, according to Delrahim.
Speaking of Comcast and NBCU, that milestone deal will re-enter the industry conversation in 2018, possibly even before regulators have signed off on a Fox transaction. Macquarie analyst Yong reminded clients that the consent decree put in effect by regulators when Comcast bought NBCUniversal will expire on Sept. 1, 2018.
Freed from the government’s restrictions, Comcast “is poised to further its ambitions in video/wireless,” Yong wrote. While the media giant threw in the towel on buying Fox’s assets, there is plenty more low-hanging media fruit to be picked.