Court approves AT&T, Time Warner Merger

by Ike Obudulu Last updated on June 15th, 2018,

Washington, D.C., USA: United States District Court Judge for the District of Columbia, Richard J. Leon, today ruled in favor of AT&T in the U.S. government’s antitrust suit to block the telecom company’s proposed US$85.4 billion acquisition of Time Warner.

The merger, including debt, would be the fourth largest deal ever attempted in the global telecom, media and entertainment space, according to Thomson Reuters data. It would also be the 12th largest deal in any sector, the data showed.

In October 2016, AT&T announced its plan to acquire Time Warner for $85.4 billion, and a total of $108 billion with debt.

The Justice Department filed a lawsuit to stop the deal in November 2017, arguing the merger would violate section 7 of the Clayton Act and that  AT&T’s ownership of both DirecTV and Time Warner would give AT&T unfair leverage against rival cable providers that relied on Time Warner’s content, such as CNN and HBO’s Game of Thrones.

The DOJ claimed that the acquisition would negatively affect competition in “the video programming and distribution market nationwide” because AT&T would be able to increase costs to access Time Warner’s networks for its rivals. AT&T and Time Warner naturally disagreed claiming that with high-speed internet access, competition from services like Netflix, Hulu, Amazon, Facebook and Google has caused decreased video subscription to their services and stagnating television advertising revenues. AT&T and Time Warner claimed the merger would help them be a better contender in the market and increase competition in the market.

The DOJ conceded that the merger would save DirecTV (a property of AT&T) customers, in aggregate, estimated $352 million every year as AT&T would not have to pay Time Warner accounting for a profit for its content. This would give AT&T an incentive to make its services more competitive as it would garner more profit itself.

The government estimated costs to industry rivals, such as Charter Communications Inc, would increase by $580 million a year if AT&T owned Time Warner.

To assuage the Trump administration’s criticisms, AT&T offered to submit pricing disagreements with other pay television companies over Turner’s channels to third-party arbitration.

The government estimated costs to industry rivals, such as Charter Communications Inc, would increase by $580 million a year if AT&T owned Time Warner.

To assuage the Trump administration’s criticisms, AT&T offered to submit pricing disagreements with other pay television companies over Turner’s channels to third-party arbitration.

AT&T in a six-week trial argued that the purchase of Time Warner would allow it to gain information about viewers needed to target digital advertising, much like Facebook Inc and Alphabet Inc’s Google already do.

The overall goal of antitrust regulations is to protect the consumer from unfair business practices that may arise from a consolidation of power within a single company. But size isn’t necessarily what’s most important in these types of cases. In fact, sometimes a merger can help competition and consumer choice, as is more often the case with vertical mergers.

A vertical merger is when two companies who provide different or complementary offerings join forces, giving consumers access to a more comprehensive set of services, at a lower price, while still generating profits. That’s not to say that vertical mergers get through regulatory approval free and clear — the FTC has fought 22 vertical mergers since 2000 — but they receive less scrutiny than horizontal mergers.

AT&T-Time Warner is considered a vertical merger, as AT&T is a content distributor and Time Warner is a content creator. But the overall landscape complicates the decision a great deal.

There are only a handful of companies in this space, and they are some of the most powerful companies in the world. AT&T itself is the largest telecom provider in the world, and via DirecTV, it is also the largest multichannel video programming distributor in the U.S. Time Warner, meanwhile, owns channels like TBS and TNT, HBO and Warner Brothers, not to mention the assets to live sports and news orgs such as the NBA, MLB, NCAA March Madness and PGA.

The DOJ argued that this type of consolidation would give the merged AT&T-Time Warner the ability to raise prices, thwarting the competition’s ability to compete by forcing them to raise prices to maintain carriage rights. The government also argued that the newly rolled back net neutrality rules would no longer stop AT&T from, say, throttling Netflix if it didn’t purchase and distribute Time Warner content.

On the other side, AT&T and Time Warner (big as they may be) face steep competition from the FAANG companies (Facebook, Apple, Amazon, Netflix and Google), all of whom have made video a top priority. AT&T-Time Warner’s counsel Daniel Petrocelli made the argument that traditional media organizations have already been left behind in the digital revolution.

From the report:

Petrocelli told Judge Leon that their estimates show FAANG is worth $3 trillion collectively, while an AT&T-Time Warner entity post-merger would be worth $300 billion. ‘We’re chasing their tail lights,’ Petrocelli said.

It’s also worth noting that President Trump has been publicly opposed to the deal since he was on the campaign trail. Remember, Time Warner owns CNN.

The deal cost AT&T’s top lobbyist, Bob Quinn, his job in May after it became public that AT& T had paid Trump’s personal lawyer Michael Cohen $600,000 for advice on winning approval.

The planned deal is seen as a turning point for a media industry that has been upended by companies like Netflix Inc and Google which produce content and sell it online directly to consumers, without requiring a pricey cable subscription. Distributors including cable, satellite and wireless carriers all see buying content companies as a way to add revenue.

The ruling could also prompt a cascade of pay television companies buying television and film makers, with Comcast Corp’s bid for some Twenty-First Century Fox Inc assets potentially the first out of the gate.

The ruling could also have implications for CBS Corp’s potential tie-up with Viacom Inc, which is already uncertain because of a lawsuit between CBS’s controlling shareholder, Shari Redstone, and its board.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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