UPDATED, with additional comments: Makan Delrahim, who as the Justice Department’s antitrust chief during Donald Trump’s administration challenged AT&T’s combination with Time Warner, has a different view of the planned spinoff of WarnerMedia.
“I wish both companies and Mr. Zaslav and Mr. Stankey the best,” Delrahim said, referring to David Zaslav, the CEO of Discovery, and John Stankey, the CEO of AT&T.
“AT&T’s combination with TW was motivated by an effort to salvage a bad deal made for DirecTV, which was why they couldn’t execute it well,” he added. “Now that DirecTV and TW have been spun off, AT&T can compete to provide American consumers the best mobile communications service, and the combined Discovery/TW can compete with other content companies to deliver the best content to American consumers.”
The transaction, announced on Monday, would spinoff WarnerMedia into a new company, with AT&T shareholders owning 71% of the combined entity, and Discovery Networks shareholders holding the remaining 29%. The new company will be run by Zaslav and Discovery management.
The deal was seen as a dramatic reversal of AT&T’s ambitions for Time Warner, the previous name for WarnerMedia, at the time that its merger was announced in 2016.
Almost a year later, in November, 2017, the Justice Department sued to block the deal, leading to a landmark antitrust showdown the following spring. A federal judge ruled in favor of AT&T, and an appellate court upheld the decision. A remedy that was discussed during the DOJ review was for AT&T to spinoff assets, like Turner Networks or DirecTV, but the merging companies rejected such an approach. Company executives suggested that the effort to block the merger was motivated by Trump’s animosity toward Time Warner-unit CNN, the White House and Delrahim and other DOJ officials denied such influence.
While that allowed the companies to close their merger in 2018, AT&T was left with a huge debt load and a dwindling subscriber base for a previous acquisition, DirecTV, leading to a dramatic change in the corporate structure.
AT&T announced a spinoff of DirecTV earlier this year in a deal with TPG. But the satellite business was valued at just over $16 billion, far less than the $48 billion AT&T paid for it in 2015.
In Washington, lawmakers have been sounding the alarm for stricter antitrust enforcement, particularly when it comes to tech giants like Facebook, Google and Amazon. Sen. Amy Klobuchar (D-MN), who chairs the antitrust subcommittee, recently published a book, Antitrust, and recently proposed legislation that would make it easier for the government to challenge mega mergers. Although Capitol Hill committees have traditionally held hearings on mergers of this size, the transaction does not need congressional approval.
Sen. Richard Blumenthal (D-CT), a member of the antitrust subcommittee, wrote on Twitter that the transaction needed extensive scrutiny. “This mega-merger combining two of the country’s largest media conglomerates demands close scrutiny to protect consumers’ pocket books instead of accelerating further concentration among corporate behemoths. Recent lax antitrust enforcement has allowed a dramatic consolidation in the media market that is driving up prices & limiting consumer choice. TV viewers & sports lovers deserve more choices about how they get their entertainment, better competition over services & lower prices.”
President Joe Biden has yet to name a new chief of the DOJ’s antitrust division, as public interest advocates have urged him to select an antitrust hardliner who has a willingness to take on big mergers. Already there has been concern over the influence that the new company may still give preferential treatment to AT&T’s distribution channels, even though it set up to be its own entity, and over the sheer scope of the combined content assets. The companies have not yet paid out a structure for corporate governance.
Still, AT&T and Discovery expressed confidence that they will have a clear regulatory path for approval.
“If I felt like we had the risk of that kind of experience again, I would not have signed up for this transaction,” Stankey said on CNN on Monday. “I believe that there is not reason this shouldn’t be a straightforward, very clean approach in the regulatory process.”
Zaslav also committed to editorial independence for CNN, while there has been speculation that with WarnerMedia spinoff, the network’s chief, Jeff Zucker, will change his plans to depart at the end of the year.
The DOJ will review the transaction, but there are doubts that it will face scrutiny from the FCC, as it does not involve the transfer of broadcast licenses. Back in 2017, Time Warner sold off some of its remaining FCC licenses and avoided a review by that agency.
“Here is a situation where AT&T recognizes the folly of its ways and wants to move on with life,” said John Bergmayer, legal director at the public interest group Public Knowledge.
The group opposed the AT&T-Time Warner merger. While the WarnerMedia spinoff untangles that transaction, there may be a new set of concerns over the leverage that the new company could exert in the marketplace, extracting greater prices for content that ultimately could be passed on to consumers. But Bergmayer said that, with streaming evolving quickly, “it is hard to know where the competitive choke points could be.”
Blair Levin, policy adviser to New Street Research, wrote in a report on Monday that he thought that the merger has some limited antitrust risk, “as the resulting content company will be a large concentration of cable channels. That, by itself, will lead to a serious examination, but would probably not be sufficient to cause authorities to block the deal.”
“Further, if the product market is defined to include streaming video services, then the concentration of market power is likely to be insufficient to cause authorities to challenge the deal,” he wrote.
He wrote that given the current environment for stricter enforcement, “there is something of a political risk in having the first deal to come before the new Biden antitrust officials.” There are concerns that approval will be a signal for further consolidation in the entertainment industry, as media conglomerates try to bilk up to compete against Netflix and Disney.
“In this case, however, the deal has the political advantage of undoing a vertical deal that progressive antitrust voices, as well as the Trump Justice Department opposed,” he wrote. “Thus, while not without some risk, we think the deal would eventually be approved.”
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