Future of Media Deals Is on the Line in AT&T Case, U.S. Says
(Bloomberg) -- U.S. antitrust officials sent a stark warning to the federal appeals court considering AT&T Inc.’s acquisition of Time Warner Inc.: No less than the future of media is at stake.
The case will help establish whether content distributors such as AT&T, with its massive network of pay-TV and wireless services, can acquire programmers, such as Time Warner, the Justice Department said in pressing its case to overturn the June ruling that allowed their merger to go through.
The outcome of the appeal will set “the standard for determining whether industry participants will be permitted to merge into vertically integrated firms that control valuable programming content as well as the means of distributing that content to consumers,” the government wrote to the court.
The litigation carries high stakes not just for the $85 billion Time Warner deal, but other mergers of companies that operate in different parts of a supply chain. The case has been closely watched because it’s the first time in decades a court has decided on a government challenge to such a deal.
A day after U.S. District Judge Richard Leon’s June 12 decision, Comcast Corp. made a $65 billion bid for 21st Century Fox Inc.’s entertainment assets. The deal would have mirrored AT&T’s purchase of Time Warner, by uniting a content company with a pay-TV distributor. While Walt Disney Co. ultimately outmaneuvered Comcast for Fox, Comcast said the AT&T decision should give investors confidence that it could win antitrust approval for buying Fox.
"We’ve seen a lot of curveballs coming out of Washington lately," said Amy Yong, an analyst with Macquarie Capital USA Inc. "All the back and forth on media deals has been unnerving for people who have lost confidence on how M&A will play out."
The Justice Department criticized Leon’s ruling, saying he had wrongly ignored the government’s core argument that Time Warner would have added bargaining power over rival pay-TV distributors that have to pay for its programming. “The reasons the district court gave for finding zero increase in leverage are implausible and internally inconsistent.”
AT&T completed the Time Warner transaction June 14, after the Justice Department agreed not to seek an emergency court order to block it in exchange for a promise from AT&T to keep Time Warner’s Turner Broadcasting as a separate business unit until 2019. That would make it easier for AT&T to sell Turner if the government ultimately prevails. AT&T’s deadline to file its brief in the appeal is Sept. 20.
“Appeals aren’t ‘do-overs,’” AT&T General Counsel David McAtee said in a statement Monday after the appeal was filed. “After a long trial, Judge Leon weighed the evidence and rendered a comprehensive 172-page decision that systematically exposed each of the many holes in the government’s case.”
Should the Justice Department win at the appeals court level, it would undo a stinging rebuke for the government and vindicate the decision by the head of the antitrust division, Makan Delrahim, to challenge the Time Warner takeover. A loss for the government would set a binding precedent that could restrict future enforcement while a win could enhance the government’s ability to police deals.
Antitrust enforcers have won merger appeals. The Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department, lost its bid in 2007 to stop Whole Foods Market Inc. from acquiring rival Wild Oats Markets Inc.
After the companies closed the deal, the federal appeals court in Washington reversed the decision and sent the case back to the lower court. Whole Foods later settled, agreeing to divest 32 Wild Oats stores.
The Justice Department criticized Leon for discounting testimony of executives from competitors of DirecTV, including Dish Network Corp. and Cox Communications Inc., who said they were concerned the deal would raise the cost of Time Warner programming.
The judge raised concerns about relying on competitors’ testimony because it could reflect “self-interest rather than genuine concerns about harm to competition.” Yet he “wholly abandoned that caution” when considering testimony of AT&T and Time Warner executives, including AT&T Chief Executive Officer Randall Stephenson, the Justice Department said.
“The testimony of merging company executives, who stand to benefit financially from approval of a merger, deserves at least as much skepticism (if not more so) as the testimony of competitors,” the government said.
In fact, while AT&T argued the merger would lead to lower prices for consumers, it announced higher prices for its DirecTV Now streaming service after the Time Warner deal closed, the Justice Department pointed out.
©2018 Bloomberg L.P.