AT&T Judge Could Clear Time Warner Deal With `No Blackout' Fix

(Bloomberg) -- AT&T Inc.’s wait is finally over. Nearly two years after inking an $85.4 billion deal to acquire Time Warner Inc., the phone giant will learn Tuesday whether a federal judge in Washington will grant the U.S. Justice Department’s request to block the takeover on antitrust grounds.

AT&T Judge Could Clear Time Warner Deal With `No Blackout' Fix

The decision hinges on whether the combination of AT&T’s pay-TV and mobile-phone businesses with Time Warner’s content would raise prices for consumers. While Judge Richard Leon could approve or block the merger outright, he also has another option: allow the tie-up with changes to protect AT&T rivals that buy Time Warner programming. Here’s a look at the possible scenarios and what could follow.

An Arbitration Fix

The Justice Department’s case comes down to whether AT&T would gain bargaining power over rival pay-TV companies leading to higher costs for consumers. The government argues AT&T could hammer rivals seeking Time Warner programming like CNN because it knows that if talks with a competing cable company break down and CNN becomes unavailable, some customers would switch to AT&T’s DirecTV business.

AT&T and Time Warner reject the government’s theory and say they’re motivated to sell their content as widely as possible. They have offered competitors the opportunity to go to arbitration to resolve disputes over programming, during which they have vowed not to pull Turner Broadcasting channels. Their offer doesn’t include HBO, however, which is one reason why the Justice Department says it isn’t a fix at all.

The question is whether the arbitration provision is enough to address any concerns Leon may have about the deal. AT&T is proposing so-called baseball-style arbitration, which requires each side to make its best offer, one of which is chosen by the arbitrator.

During the trial, Leon asked a witness from Charter Communications Inc. whether the arbitration proposal could be changed to resolve the cable company’s concerns about it. The executive said yes, explaining that his biggest issue is potentially being forced to accept terms that weren’t negotiated and that his company might not be able to honor.

"Is there a way that you could envision arbitration could be differently structured that would be mutually beneficial and mutually fair?" Leon asked Charter executive Tom Montemagno.

"Yes, I believe so," Montemagno replied.

If he wants to impose an arbitration measure, Leon first would have to find the Time Warner deal violates antitrust laws. But that doesn’t mean he would have to block it. Instead, he has significant leeway to impose a remedy that includes changes to the arbitration provision like including HBO or extending the offer beyond seven years, said Dan McInnis, an antitrust lawyer at Thompson Hine LLP in Washington. Doing that would still allow the deal to proceed.

AT&T Wins

AT&T would win an outright victory if Leon rejects the Justice Department’s case that the merger is illegal and denies the request for an order blocking the takeover. Under this scenario, Leon would have to find that the U.S. failed to show that the combination would likely reduce competition. AT&T’s arbitration offer would remain in effect for competing distributors, though Leon could clarify in his decision that the proposal is binding.

McInnis, who observed the entire six-week trial, predicts this outcome is the most likely. The government’s case depended on a flawed model that raised too many doubts about the potential price increase for consumers, he said.

"They have so many holes in their case," McInnis said.

If Leon denies the injunction, AT&T and Time Warner are free to close the transaction in six days, according to a court order.

AT&T Judge Could Clear Time Warner Deal With `No Blackout' Fix

Justice Department Wins

Leon could side with the Justice Department and grant the request for an injunction blocking the merger. The government has rejected the arbitration plan as insufficient and contends stopping the deal would protect consumers from what it says would be hundred of millions of dollars in higher pay-TV bills.

Chris Sagers, an antitrust law professor at Cleveland-Marshall College of Law, puts the odds of the U.S. winning at 60 percent. He cautioned against reading too much into Leon’s comments about Shapiro’s work.

"There have been lots of cases where judges say crazy things in court and the ruling came out different than you’d expect," he said.

The Justice Department has proposed an alternative to stopping the deal: requiring the sale of Turner Broadcasting or DirecTV. Divesting either business would eliminate AT&T’s ability to gain leverage over rival distributors and head off potentially higher costs for Turner’s programming, according to the government. The Justice Department’s antitrust division chief Makan Delrahim pushed for the sale of either business before filing the lawsuit in November. That stance reflects Delrahim’s view that competition problems arising from a merger should be fixed by selling assets rather than putting behavioral conditions on how a company conducts business.

AT&T refused, saying either scenario would destroy the purpose of the deal: to combine Turner channels with DirecTV’s network.

Appeals

Either side can appeal Leon’s decision to the U.S. Court of Appeals in Washington.

If Leon sides with the companies, the Justice Department would probably seek an emergency order to prevent AT&T from closing while the government pursues an appeal. Otherwise it would lose the chance to stop the deal because the appeals court wouldn’t rule before the companies close the transaction.

"Delrahim feels strongly about his position that this is an anticompetitive deal and behavioral remedies won’t work," said Bloomberg Intelligence analyst Jennifer Rie, who expects the government to appeal if it loses.

Winning a stay could be challenging. The Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department, has won only half of the emergency orders it has sought since 2004, according to Bloomberg Intelligence. Two attempts by the Justice Department since 2000 were denied. Even if the court denies an emergency order and the transaction is completed, the government can still pursue its appeal.

The appeals court could order the merger unwound or order AT&T to sell parts of its business like DirecTV. The more likely scenario if the government wins the appeal is that the court imposes behavioral conditions on AT&T, according to Rie.

AT&T would likely appeal a win for the government, but it faces a deadline of June 21 to complete the merger. Time Warner can walk away at that point, unless it agrees to an extension.

©2018 Bloomberg L.P.