If Regulators Care, Here Are the Hurdles to a Fox-Time Warner Deal

NEW YORK (TheStreet) -- As Time Warner (TWX) and 21st Century Fox (FOXA) play a high-stakes game of cat-and-mouse, federal regulators at the Department of Justice and the Federal Communications Commission are no doubt watching these events, and maybe even thinking of ways this proposed hyper-consolidation of media properties might run counter to federal law.

And then again, maybe not. Afterall, regulators hardly made it difficult for Comcast (CMCSA), the country's largest pay-TV operator, to acquire a broadcast station and film studio when it acquired complete ownership of NBC/Universal in 2011 .

Complicating matters is the fact that regulators already have a lot on their plate. There's the $45 billion bid by Comcast (that same company again) for Time Warner Cable (TWC) as well as AT&T's (T) proposed $48 billion acquisition of DirecTV (DTV).

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Not one who is accustomed to losing, Fox Chairman Rupert is reportedly willing to raise his offer for Time Warner to more than $85 a share -- so clearly his pursuit of Time Warner isn't over. A potential second-round bid could reach as high as $90 billion, Gabelli & Company media analyst Brett Harriss told The Street, adding it's likely Fox will come back in a month or two "with a sweeter offer."

But what about those regulators, and what might they ponder if they're given this deal?

First the easy part. Both companies have stakes in the cable-news world as owners of longtime rivals CNN and Fox News. Federal regulators are likely to demand that one of them be sold, most likely CNN.

Heading off that risk, Fox has already stated that if a deal came to pass it would seek to divest CNN which, while a headliner brand, has been losing market share while Fox News remains the number one cable news channel. Harriss estimates with $450 million in earnings before interest, tax, depreciation and amortization, and at an eleven times multiple, CNN could fetch a sale price of around $5 billion.

Conveniently, should CNN be put on the auction block, the news channel already has a willing buyer in CBS (CBS). CEO Leslie Moonves this week said that should regulators force Fox to sell CNN to win government approval for a Time Warner deal, his not-so-small media company would certainly consider buying it. 

"It's something I'm sure we will look at if that becomes available," Moonves said in comments at a gathering of the Television Critics Association, as reported by Reuters.

However, cable-news aside, regulators will be evaluating whether a combination would affect competition in all strata of its programming portfolio.

"I'd look not just to programming but to subsets of programming -- for example, news, sports, etcetera," John Bergmayer, senior staff attorney at non-profit media watchdog Public Knowledge, told TheStreet. "The DoJ's primary hook would be antitrust."

For example, television production could be a contentious point for regulators with CBS, the only other company with a major stake in the creation of content for broadcast. While estimates of Fox generating $800 million EBITDA in broadcast may seem insignificant compared to Time Warner's $7.3 billion EBITDA, the impact would not be "immaterial," added Harriss. In the quarter ended March, Fox's television revenue, excluding cable, accounted for 18% of total sales generated.

Bergmayer also notes the Federal Communications Commission would be concerned with the "transfer of TV broadcast licenses from one entity to another -- the FCC can only approve such transfers if they are in the public interest." Under one roof, a Fox-Time Warner company would hold channels including HBO, TNT, TBS, and Fox, a concentration which would give Murdoch an uncomfortable level of control over the broadcast spectrum.

To the silver screen, regulators could take issue with the combined company's film production segments. Over 2013, Time Warner generated 17% of the U.S. box office total. Warner Bros. claimed the title as number one film studio with $5.04 billion in global ticket sales, driven by box-office winners the likes of Man of Steel, Gravity, and The Hobbit: The Desolation of Smaug.

Over the same period, Fox generated 10% of the U.S. box office, with the fourth largest haul globally of $3.4 billion, buoyed by the success of The Croods, The Wolverine, A Good Day to Die Hard, and The Heat. In total, the two companies held a 27% share of the U.S. box office, and around 36% share of the $24.5 billion amassed by major movie studios globally in 2013.

All these arguments would prove moot, though, if the FCC knocks back a deal purely because of the degree of consolidation the industry is currently witnessing given the two mega-mergers initiated by Comcast and AT&T.

Ultimately though, federal regulators are more likely to spar on deal terms and the imposition of fair-trade conditions than block a deal outright. In a similarly contentious acquisition in 2011, the DoJ required Comcast to agree to provide NBC shows at fair rates to rivals in its purchase of NBC Universal.

In the same year, the FCC allowed AT&T to purchase unused wireless spectrum from Qualcomm  (QCOM) which, though it said raised some competitive concerns, would be approved of provided AT&T offered data roaming to competitors.

The DoJ and FCC could follow the same playbook if a Time Warner-Fox deal falls on their desk in the future.

--Written by Keris Alison Lahiff in New York.

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