AT&T, Welcome to Hollywood. Comcast, Good Luck.
(Bloomberg Opinion) -- Randall Stephenson, welcome to Hollywood.
Nope, still sounds weird.
The buttoned-up chairman and CEO of Dallas-based AT&T Inc. has spent nearly four decades in the comparatively mundane telephone industry. Now, the 58-year-old is about to become one of the most powerful men in media and entertainment.
On Tuesday, AT&T prevailed over the U.S. Justice Department, with U.S. District Judge Richard Leon allowing the company to go ahead with its $109 billion takeover of Time Warner Inc., the parent of HBO, Turner Broadcasting and Warner Bros. film studio (the valuation includes assumed debt). Judge Leon said he rejected the DOJ’s request to block the transaction because the government “failed to meet its burden” to show how it will substantially reduce competition. That doesn’t mean it won’t, it just means they didn’t argue a strong enough case proving it will.
This has been a long road—AT&T and Time Warner agreed to the merger back in October 2016 and didn’t anticipate such resistance. But while the ruling was what the majority of us ultimately expected, the implications of the decision are suddenly palpable. Most notably, the judge imposed no conditions on the companies. It seems we really have entered an “anything goes” merger environment.
And so, while the AT&T crew is off celebrating somewhere, the bankers for rival Comcast Corp. are probably drawing up plans to exploit the ruling. I wouldn’t be surprised to see it announce a competing bid as soon as Wednesday for the assets 21st Century Fox Inc. has been planning to sell to Walt Disney Co.
Tuesday’s decision, in allowing a so-called vertical merger, also could be interpreted as good news for companies in other industries pursuing conglomerate-building. CVS Health Corp. offered in December to buy insurer Aetna Inc. in a deal it valued at $77 billion, while Aetna’s rival Cigna Corp. has since offered to acquire pharmacy-benefits manager Express Scripts Holding Co., a competitor to CVS, for $67 billion. Shares of both takeover targets rose in after-hours trading following the Time Warner decision.
There’s no point in arguing a case that’s closed, but I will say that the government’s concern about the consolidation of power in this deal and all the other transactions it may inspire was warranted. At the root of almost all mergers is a quest for more market power, or simply put, the ability to raise prices. Pricing power is something AT&T and the other distributors of media are losing as consumers flock to cheaper online services like Netflix Inc., where the margins are much tighter, and after competition from T-Mobile US Inc. drove other carriers to lower the cost of mobile-data plans. The struggle to find growth also isn’t something unique to the media giants, which is why once unthinkable megamergers are being considered.
When Judge Leon presided over the case against Comcast’s deal to buy NBC Universal in 2011, it was clearer how the transaction could harm the media industry because it was much simpler then. It’s harder to predict the future when the present is still so messy. Netflix’s success has spawned dozens of copycat apps. Some are like AT&T’s DirecTV Now service, a so-called skinny bundle of channels streamed over the internet that basically serves as a cheaper version of a traditional cable package. Others are like Time Warner’s HBO Now service to binge on shows like “Game of Thrones.” Both have lots of competition.
AT&T needed this deal to help justify an otherwise disappointing one for DirecTV three years ago. Now it will be interesting to see how the various constituents at this new media conglomerate fight for resources. Producing content is expensive, and AT&T needs to invest in building a 5G wireless network, satisfy a dividend-hungry telecommunications shareholder crowd and pay off all the debt that comes with this deal.
In the meantime, this new AT&T needs a better logo. It’s in showbiz now.
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