The U.S. Department of Justice filed paperwork to appeal a Federal court’s approval of AT&T’s acquisition of Time Warner, despite having been warned by the judge in the case not to. This morning AT&T CEO Randall Stephenson said he expected the DOJ to appeal, but that the appeal “doesn’t change anything.”
Appearing on CNBC’s “Squawk Box” this morning, Stephenson was asked if fending off the Feds again will be expensive. Stephenson responded, “it’s been an expensive costly process already … It will be a costly process. But look, at the end of the day, it doesn’t really matter that much to us. It doesn’t change anything I’m going to do today other than we’ll talk about this rather than the merits of the deal and what we’re doing as a business. But the transaction is closed. And we’re executing on the transaction.”
One month ago, on June 13, Judge Richard Leon of the U.S. District Court of the District of Columbia ruled in U.S. v. AT&T to allow the $85 billion transaction without condition.
The DOJ originally took the position that the combination was anti-competitive. Judge Leon in his detailed, 172-page, June 13 ruling determined that the DOJ had thoroughly failed to make its case. In his conclusion, Leon cautioned the DOJ not to request a stay or file an appeal, saying it would very likely fail (again) on the merits. He wrote that his warning was explicitly meant to forestall the Trump Administration from altering the deal via procedural shenanigans.
President Donald Trump, while still a candidate, had railed against the merger. He was vociferously hostile to the media then, and remains so.
Judge Leon acknowledged this hostility in his ruling and noted the likelihood that after losing U.S. v AT&T, the Trump Administration might try to block the deal by some other means. One of those possible means would be to file a stay or an appeal.
Neither action would have to be accepted on the merits, let alone be adjudicated; simply filing would drag out the process beyond the June 21 deadline for the deal. Missing that deadline would have automatically triggered a provision in AT&T and Time Warner’s negotiating agreement with each other that would have forced former to pay the latter a breakup fee of $500 million. Time Warner would then also be free to renegotiate better terms or walk away entirely.
The DOJ partially heeded Judge Leon’s warning, given it did not file its appeal between the ruling on June 13 and the breakup date of June 21. Filed three weeks after that deadline, the appeal apparently won’t automatically nix the deal, but the process of dealing with it will still represent a months-long and costly delay at the very least.
At most, it is presumably possible that DOJ lawyers have crafted a completely different argument that Federal Courts might find compelling. The department has not announced even having filed an appeal as of Friday morning, however, let alone discussed the legal specifics.
Stephenson noted on Squawk Box this morning that AT&T has yet to read the DOJ’s filing.
Through the entire merger process, AT&T's CEO has been scrupulously avoiding saying that the federal response to the merger might be yet another Trump vendetta, but CNBC reporters would not let the question go.
In response to their repeated questions, Stephenson said “The original lawsuit, people were saying, ‘what is the basis of the lawsuit?’ and the complaint was filed and everybody read it and kind of had a hard time discerning really what was the basis of the complaint. 25 million pages of documents are collected. We go through depositions. We go through an entire trial. And at the end of the trial we get a very—I thought—thoughtful, very thorough, very fact-based order. And, you know, it basically said that this is pro-competitive. So now we go to appeal, and at some point one has to question is the transaction actually pro-competitive? So it’ll be interesting. We don’t know exactly what the government’s basis will be for the appeal.” (Stephenson’s comments are taken from a transcript of the show forwarded by AT&T.)
Wall Street seemed to take the news mostly in stride.
In mid-day, trading, AT&T was off about 1%, though the stock has been trending downwards since the beginning of the year. A share was hovering around $37 in January, and in today’s trading it dipped under $32. The Wall Street consensus price is above $37.00.
AT&T stock may have been sliding on its own, but the DOJ isn’t doing AT&T any favors. In response to the report of the appeal, Raymond James dropped its estimate of AT&T from outperform to market perform, calling the appeal “a negative catalyst.” The firm still believes the deal will go through, however; it simply thinks investors will lose patience holding the stock while the Feds drag out the legal proceedings even further.
Jefferies basically shrugged. The DOJ is creating uncertainty, the firm said, but probably won’t prevail given Judge Leon’s dismissal of the department’s arguments to date.
Wells Fargo Securities said its regulatory contacts view this as “more about the DOJ earning political capital than necessarily wanting to unwind the T/TWX merger.” In other words, even some Feds think that the DOJ action is just political theater.
Wells Fargo analysts themselves “view this as more of a headline risk than actual events to stop the momentum of the T/TWX integration. We do not expect T to pull back on the strategy of integrating this asset and would expect John Stankey (T’s CEO—WarnerMedia) to continue to devote 100% of his time and focus in merging the two companies.”