AT&T-DOJ Decision Will Prompt “Pinball Action” In Media M&A

Decision Day is at hand. On Tuesday, U.S. District Court Judge Richard J. Leon will deliver his long-awaited decision in the Department of Justice’s lawsuit against AT&T, which seeks to block the $85 billion merger with Time Warner.

The stakes don’t get much bigger than this. Not only are a host of top-level management slots within Time Warner’s various divisions going to be up for grabs, but Leon’s ruling will reshape the entire media business. The deal was already viewed as a game-changer back when it was announced in October 2016. Now, 20 months later, the number of moving industry parts has multiplied, and the anxiety level of traditional media players fighting the insurgence of deep-pocketed tech companies has continued to spike.

“I do think there’s some pinball action here,” said Doug Creutz, an analyst with Cowen and Co., in an interview with Deadline. “Whatever the judge says in this case affects what happens in Disney-Fox-Sky-Comcast quadrangle.” You can also add the CBS-Viacom-National Amusements triangle, and other companies looking for more scale, among them Sony, Lionsgate and MGM, as well as large entities like Verizon who have been on the prowl.

Most of the money is on a favorable outcome for AT&T, based on the long odds against the government from the beginning and the general sense that its legal team, led by the DOJ’s Craig Conrath, did not land any devastating blows in its bid to prove the merger would harm consumers. The defense case, led by Daniel Petrocelli, did not go without a hitch, and the company faced an embarrassing side show when it emerged it had paid Donald Trump fixer Michael Cohen for inside information. Nevertheless, most observers came away feeling the demonstration of consumer harm from the deal never quite materialized.

“Had this merger been announced three years earlier, the Department of Justice’s case against it would have been stronger,” said Mary Kelly, Associate Chair of Economics at Villanova School of Business. “But the media landscape has changed dramatically and will continue to do so.”

For the two CEOs at the center of the storm, the judge’s view of the deal will undoubtedly affect their legacies. Randall Stephenson, who heads AT&T, has gamely sought to put a brave face on the tumultuous tangle with the government. Asked recently at a conference about whether he was contemplating a Plan B in case the deal is not approved, he said, “I don’t want to even go there.” For Jeff Bewkes, the career Time Warner exec, who testified during the trial about his early days at the company as a junior marketing exec at HBO, the deal would be the capstone of his four-decade run. During his testimony, Bewkes repeatedly characterized the merger as a must for Time Warner if it is to “make it through to the next round” of media consolidation. “We need a technology partner,” he explained. “A helping company.”

Creutz said he has always felt the merger had flaws from the beginning, and he is not alone in that opinion. “It solves Time Warner’s problem in the short term,” he said. “But it doesn’t solve the long-term problem with how the company can compete – it just moves the problem to another set of shareholders.” Despite the ballyhoo about the peanut-butter-and-chocolate inspiration of blending the two companies’ disparate areas of expertise, Creutz isn’t convinced. (He covers Time Warner, but doesn’t personally cover AT&T.) “People have tried to combine distribution and content forever,” he said. “But the problem is, a content owner wants their content in as many places as possible. To tie yourself to one distributor can be limiting.”

Anticipating a positive outcome, Comcast has loudly indicated its intent to make an aggressive, all-cash bid for the 21st Century Fox assets that Disney has agreed to buy for $52.4 billion. Meanwhile, it is revving up for a separate bidding war with Fox for control of Sky, the European pay-TV giant. The ruling also would have implications for the $26 billion hook-up of Sprint and T-Mobile, two smaller rivals to AT&T whose previous attempt at a combination was quashed in 2014 by the Obama Administration.

If Leon ends up ruling in favor the government, blocking the deal, Time Warner will be able to rebound fairly quickly. Bewkes has spent the past decade shaping the company into a content-centric machine, ditching non-strategic assets like AOL, book and magazine publishing, music and cable systems. The company “would still be ‘for sale,'” points out Sanford Bernstein analyst Todd Juenger in a research note, “and (depending on the specifics of why the outcome was ‘no’) we expect the market would price Time Warner stock with an acquisition premium.” The offer price for Time Warner was $102 a share. It began the week at $96.25, a sign of continued investor confidence amid several solid quarters of financial results.

The judge also could strike a middle ground, approving the combination with remedies to address anticompetitive concerns. UBS analyst John Hodulik notes those could mirror the “behavioral” remedies imposed on the Comcast-NBCUniversal deal, such as eliciting a promise to provide rival distributors access to video content, or “structural,” such as forcing AT&T to sell off Turner Networks or DirecTV.

.

However the judge rules, either side could appeal the decision — prolonging the outcome even further. A protracted legal battle might prompt shareholders to pressure Time Warner to haul AT&T back to the bargaining table and ask for more money.

The financial and operating implications of the merger are plenty to chew on. But this case has also raised a range of political and regulatory questions. Chief among them, though it faded from view during the trial after Judge Leon barred it as a line of argument from defense lawyers, is the role CNN may have played in arousing the 11th hour opposition from the DOJ. The deal was viewed as days away from clearing its final hurdle last fall, when suddenly the DOJ girded for legal battle, fueling speculation that the entire operation was a Trump-led effort to punish the owner of his least-favorite media outlet.

Barry Lynn, executive director of the non-partisan, anti-monopoly Open Markets Institute, points out that the Trump element has always been somewhat of a mystery. But he notes that Trump spoke out against the deal’s scale before winning the election. And while many on the left rarely find common ground with the president, he argues that the fact that his appointee atop the DOJ’s antitrust division, Makan Delrahim, brought the case at all is something to celebrate regardless of the outcome. Delrahim and other officials have insisted Trump’s feud with CNN was never a factor, instead arguing that the “behavioral remedies” inherent in a vertical merger like this become a regulatory burden.

“One of the benefits has been to see that Democrats can support some of what Trump is doing,” Lynn told Deadline. “The DOJ is very isolated from Trump. There’s a lot of infrastructure to protect them from what Trump wants to do.”

The CNN issue ultimately proved to be a distraction from the central criticism of the deal from the left and the right. “We want to avoid over-concentration of media,” Lynn said.

Asked how the lawsuit could emanate from the very administration handing giant tax breaks to corporations and stripping away decades of regulation that had restrained big business, Lynn shrugged. “Trump is a very mixed-up person,” he said.