Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The Justice Department is taking a harder line than expected on AT&T Inc.'s planned merger with Time Warner Inc., reportedly asking the companies to either sell Turner Broadcasting -- home to President Donald Trump's favorite nemesis, CNN -- or divest DirecTV in order to complete the $109 billion transaction.

Whether or not politics are playing a part in any of this, either option isn't much of a choice for AT&T, and so the wireless giant should take its chances in court. 

Bailing on Bets
Merger arbitrageurs are signaling that they see less than a 50 percent likelihood of AT&T completing its Time Warner acquisition, but the odds may be better than that
Source: Bloomberg
Note: Assumes an exchange ratio of 1.437 AT&T shares, but if AT&T has an average price exceeding $41.349 at closing, the exchange ratio will be 1.3 shares.

Both divisions appear to be crucial to AT&T's strategy to diversify its revenue with video services and advertising for the content viewed on them. Turner, currently owned by Time Warner, operates television networks such as TBS and TNT in addition to CNN. AT&T acquired DirecTV two years ago for $67 billion to add a satellite-TV business, which has since expanded to include DirecTV Now, its own over-the-top streaming app. And while DirecTV is struggling and probably worth substantially less than what AT&T paid for it, video distribution would still appear to be a crucial piece of the puzzle. 

This latest development may offer a dose of reality for some eager bankers, but it's positive for consumers that the DOJ is perhaps as thoughtful as it ever was. If it's asking for all of Turner and not just CNN to be split off, it also would throw some cold water on the speculation that regulators may in this case act in retaliation at the direction of Trump, who is resentful of and openly disparages CNN's coverage of his administration. For his part, AT&T CEO Randall Stephenson said in a statement Wednesday the company has no intention of selling the network.

As for the DOJ, its reluctance to approve this merger without concessions is warranted. AT&T is kicking off what may be years of consolidation of power over media and wireless assets, or at the very least a reshuffling of them among very powerful people. Just this week came word that Walt Disney Co. explored a deal to buy the majority of 21st Century Fox Inc. as it seeks scale and more valuable content to counter the cord-cutting trend. There's also been a perception on Wall Street that the Republican administration -- and President Trump himself -- are so "pro-business" that the idea of, say, a merger of Comcast Corp. and Charter Communications Inc. being kicked around isn't unthinkable. 

All that said, the DOJ doesn't stand a great shot in court, and Bloomberg News reports that AT&T "is ramping up preparations to fight" the DOJ in court if the agency does sue to block the deal. Regulators would need to make the case that AT&T buying Time Warner is harmful to competition, an argument with holes given that the two companies aren't competitors, so no competition is technically being removed from the market. The long-term ramifications, if any, are much more nebulous and therefore tough to prove. It can't be good for consumers, right? The root motivation of just about all mergers is more pricing power, something wireless carriers, pay-TV providers and even many TV networks are losing. But is it bad for consumers? Prove it.

DirecTV Setbacks
The satellite-TV business that AT&T acquired is hemorrhaging customers, even as it entices some cord-cutters to subscribe to its cheaper DirecTV Now skinny-bundle streaming service
Source: Bloomberg

There's also a lot of competition being created on the over-the-top streaming side, which is eating into the companies' margins because the services are that much cheaper than traditional cable packages. 

Time Warner investors -- or more likely merger arbitrageurs betting on the transaction -- are getting nervous, though. The stock dropped about 6 percent Wednesday and it's down 14 percent over the last month. That's reduced the trading-implied probability of the deal closing to about 44 percent. It's already been over a year since the merger was announced, and AT&T's shares have fallen 11 percent since.

The knee-jerk reaction may be to start talking of the deal being blocked, but it's far too soon to make that prediction. AT&T has no reason to agree to what it probably sees as extreme concessions. See you in court.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net