AT&T Deal Win Against U.S. Seen Constraining Merger Enforcement
(Bloomberg) -- AT&T Inc.’s sweeping court victory allowing its takeover of Time Warner Inc. delivers a sharp setback to the Justice Department’s new approach to policing mergers under President Donald Trump and promises to spark a merger wave across industries.
The federal judge’s decision raises the bar for the government’s ability to challenge deals between companies that don’t compete directly. That opens a pathway for firms contemplating such deals, especially in media where distributors are racing to acquire content companies.
Comcast Corp. is expected to be the first out of the gate, making a formal offer for 21st Century Fox assets as early as Wednesday, according to a person with knowledge of the matter who asked not to be identified because the details are private.
At issue for Comcast and other companies is how antitrust enforcers will approach so-called vertical deals that unite companies operating in different parts of a supply chain rather than direct competitors. The Justice Department’s lawsuit against the Time Warner takeover marked an unprecedented challenge after years of a light-touch approach by enforcers in similar deals.
“This ruling will open the floodgates, at a minimum, to more vertical mergers of this kind,” said Gigi Sohn, a former lawyer with the Federal Communications Commission and who is now at Georgetown University. “Comcast will bid for Fox’s assets. Other cable and broadband companies will look to merge with the remaining Hollywood studios and other programmers.”
The Justice Department’s lawsuit, led by antitrust chief Makan Delrahim, came against a backdrop of criticism that decades of lax merger enforcement by the government has led to increased concentration across industries. By bringing the Time Warner case, Delrahim took a tougher stand, breaking with past practice of approving vertical deals after placing conditions on how companies operate. Instead, Delrahim demanded the companies sell business units -- so-called structural remedies -- to fix competition problems.
His defeat makes it unlikely he can continue to deliver on that strategy, said Chris Sagers, an antitrust law professor at Cleveland-Marshall College of Law.
“This is probably the end of meaningful vertical enforcement for a good long time,” Sagers said.
Before Tuesday afternoon’s decision by U.S District Judge Richard Leon in Washington, Delrahim indicated he wouldn’t back down from demanding that companies doing vertical deals sell assets to resolve competition problems. He argues that anything less requires antitrust enforcers to act like regulators to ensure that companies comply with promises to conduct business in a certain way.
The decision doesn’t necessarily spell the end for vertical enforcement because it’s so dependent on the specific facts raised in the Time Warner takeover, said Michael Carrier, a law professor at Rutgers Law School. Still, with the judge finding so many flaws in the government’s case, it’s clear the Justice Department will need to provide more evidence to prove its case next time.
“It really is an across the board rejection of the DOJ’s case,” Carrier said. “They need air-tight support for their economic theory of harm.”
The impact of Leon’s decision was reflected instantly in media stocks. Fox, which already has an agreement to sell assets to Walt Disney Co., gained as much as 6.1 percent in late trading as the AT&T win fueled expectations that a competing Comcast offer would face lower regulatory hurdles.
Comcast is set to make a bid that’s higher than what it offered for the assets late last year, people with knowledge of the matter said last month. Comcast may be able to use the AT&T ruling to bolster its bid, because like the Time Warner deal, an acquisition of Fox by the cable company would unite a programmer with a distributor.
Lions Gate Entertainment Corp. gained as much as 9.5 percent, while Discovery Inc. rose as much as 5.1 percent.
Shares of companies that are targets in vertical takeovers also rose on the decision. Express Scripts Holding Co., the pharmacy benefit manager that has a deal to be acquired by health insurer Cigna Corp., gained 5.6 percent in late trading. Health insurer Aetna Inc., which has agreed to sell itself to CVS Health Corp., rose 3.8 percent.
The ruling “confirms what the antitrust community has known for the past 30, 40 years -- that vertical combinations like this are more likely to deliver pro-competitive efficiencies than they are likely to harm competition,” said Eric Mahr, a partner at Freshfields Bruckhaus Deringer and a former Justice Department lawyer.
Senator Amy Klobuchar of Minnesota, the top Democrat on the Judiciary Committee’s antitrust panel, called for the Justice Department to appeal Leon’s ruling.
“Allowing this merger to proceed raises serious concerns for consumers and the future of American media,” Klobuchar said. It “also sends a troubling signal to others that it’s open season for vertical mergers that could allow a company to raise the cost of essential products and services that its rivals need to compete, leading to higher costs for consumers and less innovation.”
The Justice Department may be able to reverse Leon’s decision on appeal only if it can point to errors made by the judge, said Henry Su, a lawyer at Constantine Cannon in Washington.
An appeals court is “not going to second-guess findings of fact that Judge Leon made,” Su said.
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