AT&T Clash in D.C. Threatens Chill on Consolidation in Media

Updated on
  • Resistance to Time Warner purchase upends conventional wisdom
  • Justice Department official takes hard stance in first review
Walter Piecyk, a BTIG analyst, discusses AT&T’s bid for Time Warner.

Media executives dreaming of megamergers got a wake-up call this week: The Trump administration isn’t the rubber stamp they’d once thought it would be.

In media circles, the Trump presidency was seen as ushering in a new era of consolidation, largely because Republican administrations are thought to be more business-friendly.

Now, Washington is no longer considered a sure thing. In the first major test of its approach to merger reviews in the Trump era, the Justice Department has pushed back against AT&T Inc.’s $85.4 billion takeover of Time Warner Inc., throwing the deal into jeopardy.

AT&T had expected the deal would be done by now. “I thought that was a lay-up,” AT&T Chief Executive Officer Randall Stephenson said Thursday at a New York Times conference. He’s been seeking the deal to deliver programming from Time Warner, the home of HBO and the Warner Bros. studio, to AT&T’s pay-TV users and wireless subscribers, with advertising tailored to their tastes.

The sudden resistance from regulators isn’t just a potential setback for the telecom giant. It’s a warning shot to other media companies contemplating their own tie-ups. 

“The narrative that Democrats will reject anything and Republicans will approve anything can be thrown out the window,” said Craig Moffett, an analyst at MoffettNathanson. “It’s a reminder that just because Republicans are in charge doesn’t mean anything goes at DOJ.”

Rising Tensions

AT&T’s battle with antitrust officials escalated this week as the two sides sparred over whether the company should sell assets to get the deal approved. Forcing AT&T to sell off the Time Warner division that includes CNN has come up in talks between the companies and Justice Department officials, according to people familiar with the matter. 

The focus on asset sales is a surprise since the Justice Department was said to be discussing conditions to ensure a level playing field for rivals. That was before the new chief of the antitrust division, Makan Delrahim, was confirmed by the Senate and joined the review of the deal. He has said he isn’t a fan of conditions that force the Justice Department into ongoing monitoring of companies’ behavior.

AT&T’s Stephenson said this week he won’t sell CNN, and is girding for a potential court battle in case the government sues to block the deal.

“If the companies choose to litigate, they have a good chance of winning the battle,” said Jennifer Rie, senior litigation analyst at Bloomberg Intelligence. “While the DOJ has been successful in recent M&A court challenges, they have all been mergers of competitors, rather than vertical, like this one.”

AT&T-Time Warner M&A Hits Snag Yet May Flourish in Judge’s Hands

If the transaction falls apart, other bidders could emerge for Time Warner. Apple Inc., for instance, reportedly approached Time Warner about a possible deal before AT&T agreed to buy it. And 21st Century Fox Inc. made an offer for Time Warner years ago.

“But we think new bidders could be wary,” said Doug Creutz, a media analyst at Cowen & Co. “If the DOJ objects to an AT&T buy, they might equally object to other prospective buyers of significant scale.”

Other Deals

Even if AT&T prevails in court, the government’s tough stance could have a chilling effect on other deals that would need its approval. Walt Disney Co., for instance, recently held talks to buy 21st Century Fox Inc.’s movie studio and other assets. Sprint Corp. and Altice NV, the cable company, have both considered bids for the cable giant Charter Communications Inc.

Meanwhile, Discovery Communications Inc. is awaiting government approval to buy Scripps Networks Interactive Inc., and Sinclair Broadcast Group Inc. is seeking clearance to purchase Tribune Media Co.

Trump warned during the campaign that his administration would fight AT&T’s tie-up with Time Warner, arguing it would concentrate too much power in one company. His hostile views toward CNN have fueled speculation that he ordered the Justice Department to force the sale of the cable news network as revenge for what he calls its “fake news” reporting. Democrats including Senator Al Franken of Minnesota and Senator Brian Schatz of Hawaii have said the Justice Department must demonstrate that it’s not acting against the merger for political reasons.

The Justice Department said this week it’s reviewing the deal on its merits.

As recently as Oct. 5, Time Warner was trading as high as $103.64, close to AT&T’s offer price of $107.50 -- a sign that investors were more confident the deal would get approved. The shares closed at $87.05 on Thursday, illustrating fresh doubts about the transaction.

Until recently, AT&T’s acquisition seemed assured because there was precedent: In 2011, regulators signed off on similar deal between Comcast Corp. and NBCUniversal, combining a large distributor of pay television with a creator of television programming. The companies agreed not to interfere with internet subscribers’ web traffic and to share NBC programming with online rivals, among other conditions. AT&T had said it was open to similar arrangements.

Deals between TV distributors and programmers, known as vertical mergers, are considered easier to get cleared in Washington because they don’t involve one rival taking out another to reduce competition -- a horizontal merger. Last year, before he was nominated by Trump to lead the Justice Department’s antitrust division, Delrahim said AT&T’s deal “would have an easier route toward approval than a merger of two competitors.”

The Justice Department has said Delrahim was speaking before he’d been privy to all the information about the merger. But his comments may also give pause to media companies who look at buying rivals, as Disney sought to do in its discussions with Fox.

"It’s not crazy to read into this that if you can’t sell a vertical deal to DOJ then a horizontal merger would be a heavy lift," Moffett said.

Sending Message

The AT&T-Time Warner deal marks Delrahim’s first major deal review since he took over the antitrust division in September. He’s wasted no time sending a message.

“Before this people were saying anything could go through because Trump would be a rubber stamp,” said Jonathan Chaplin, an analyst at New Street Research. “By taking a tough stance on this deal, Delrahim has changed the narrative. He’s put the whole world on notice. The message is: ‘These guys are taking a hard look at everything.”’

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