AT&T and the U.S. Justice Department are going to court over AT&T’s proposed $85 billion takeover of Time Warner and there are a few ways this thing could play out, according to analysts.
AT&T winning out over the lawsuit has been a common prediction even before the DOJ made the suit official, and AT&T has certainly indicated it won’t back down or accept a divesture of Turner Broadcasting or CNN as a condition.
“We do not intend to settle this matter out of simple expediency because the rule of law is at issue here. Consistence in the application of the law is critical in a free market economy and it’s equally important for preserving confidence in our government, confidence that they will fairly adjudicate the matters brought before them. When the government suddenly, and without any notice or due process, discards decades of legal precedent, businesses large and small are left with no guideposts. Every business combination or significant investment becomes subject to the whim of a regulator. As we’re seeing here, that tends to be a roll of the dice,” said AT&T CEO Randall Stephenson during a press call on Monday.
Wells Fargo analyst Jennifer Fritzsche said AT&T continually noted during the press call that the onus on the DOJ to prove the merger violates the law. Fritzsche also noted that AT&T requested an expedited trial.
“While we are not legal experts, our read of the complaint is very vanilla with no apparent ‘smoking gun,’” wrote Fritzsche in a research note. “We continue to (strongly) believe the facts and law are on AT&T’s side.”
“But that said, the overhang of a lawsuit could add a different intangible dimension to the company’s current momentum. Recall, in July AT&T’s entire corporate structure was set up around the presumption this merger would close as planned and AT&T has raised $46.4 billion of global bonds YTD2017. Given these issues, we believe AT&T’s ask for an ‘expedited’ case is of utmost importance.”
Like AT&T, the DOJ has signaled it won’t back down unless it gets a significant structural remedy in place.
“This merger would greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy,” said Assistant Attorney General Makan Delrahim in a statement. “AT&T/DirecTV’s combination with Time Warner is unlawful, and absent an adequate remedy that would fully prevent the harms this merger would cause, the only appropriate action for the Department of Justice is to seek an injunction from a federal judge blocking the entire transaction.”
MoffettNathanson analyst Michael Nathanson makes the case that the lawsuit may not be so clearly in AT&T’s and Time Warner’s favor, and could bend in the direction of the Justice Department. He said that by applying the Program Access Rules written in 1992, the DOJ could argue that AT&T has clear incentives to withhold “must-have” content like TBS, TNT, CNN and HBO from competing traditional distributors as well as emerging virtual MVPDs that go up against AT&T’s DirecTV Now offering.
“Contrary (again) to much of the rhetoric floating around with respect to the DOJ's suit, it is simply not the case that this is a ‘novel’ legal theory. Section 7 of the Clayton Act, as amended in 1950, is clear on this topic. Vertical mergers are held to the same anti-competitiveness standard as are horizontal ones. AT&T's counter-argument, that they have no intention of behaving anti-competitively (say, by withholding content from existing or potential competitors) is unlikely to be convincing to the Courts,” wrote Nathanson in a research note.
Instead of going to court, AT&T and the DOJ could reach a settlement. During the press call, Stephenson said that even though he is “troubled” by the DOJ’s lawsuit, AT&T continues to look for solutions that will allow the merger to close.
Cowen Research analyst Paul Gallant said that settlements over DOJ suits have happened before with the 2003 Data-Concord case, settled the morning the trial was scheduled to begin, and the 2013 American-US Airways case, which settled about two weeks before trial. He also said that DOJ may want to avoid another loss like Oracle-Peoplesoft in 2004. He also notes that AT&T may want to avoid facing uncertainty related to whichever judge ends up presiding over the trial.
Gallant notes that AT&T said selling CNN is a “non-starter” and therefore hypothesizes about whether a TBS or TNT divestiture could appease the DOJ.
“We don’t know if AT&T would consider selling TNT and/or TBS—that would be a painful price to pay essentially for managing the unpredictability of court cases. But DOJ’s complaint did focus on the rising value of live sports and news as a differentiator against Netflix and Amazon. So divesting those might let DOJ declare victory. Given both sides’ strong public statement, if there is still deal space, divesting TBS and/or TNT might be it,” wrote Gallant.