The Department of Justice's lawsuit to block the merger of AT&T Inc. (T) and Time Warner Inc. (TWX) leaves the deal parties and investors uncertain about the fate of their $108.7 billion merger. But they're not the only ones affected.
AT&T Chairman and CEO Randall Stephenson argued that the move by antitrust boss Makan Delrahim leaves a much larger group of companies and investors equally in the dark. "I would suggest to you that this lawsuit has the whole world questioning what they will, can and cannot do," Stephenson said at a media presentation late Monday, Nov. 20, following the government's law suit. "This throws a huge degree of uncertainty to anybody contemplating joint ventures, anybody contemplating M&A. And that's one of the key concerns about this."
With Netflix Inc. (NFLX) , Amazon.com Inc. (AMZN) , Apple Inc. (AAPL) , Alphabet Inc.'s (GOOGL) Google and Facebook Inc. (FB) directing more money and energy toward video, Barclays Capital analyst Kannan Venkateshwar suggested in a Tuesday report that media companies are all trying to get bigger.
"However, given the DOJ's action, it is tough to believe that management teams will actively pursue inorganic growth until the T/TWX lawsuit is resolved," Venkateshwar wrote. Separately, AT&T may feel the need to increase its discounts and other promotional efforts to "establish its competitive credentials in court," Venkateshwar suggested, making the pay-TV marketplace tougher for now.
On Tuesday, the case was reassigned from Judge Christopher Cooper to Senior Judge Richard Leon. Cooper's Chambers would not say why the court reassigned the case.
Leon practiced at Baker & Hostetler and Vorys, Sater, Seymour and Pease before his appointment to the court in 2002. Among other postings in Congress, Leon was deputy chief minority counsel for the U.S. House Select "Iran-Contra" Committee during a 1987 investigation into the Reagan administration and special counsel to the U.S. House Banking Committee during the Whitewater investigation of the Clintons in 1992. At the Department of Justice, Leon was deputy assistant attorney general in the environment division and senior trial attorney in the criminal section of the tax division.
Cooper served in the Clinton administration's Department of Justice as a special assistant to the deputy attorney general from 1994 to 1996. He later practiced at Miller, Cassidy, Larroca & Lewin; Baker Botts LLC; and Covington & Burling LLP, before being appointed to the U.S. District Court in Marcy 2014 by a unanimous Senate vote. Much of Cooper's practice work centered on corruption and white collar crime, according to an affidavit he submitted to the Senate. Cooper's recent cases include presiding over a New York Times lawsuit against the Department of Justice's rejection of a Freedom of Information Act. The Times had requested a classified 1984 memo regarding the National Security Agency's surveillance activities; Cooper sided with the DoJ.
If the Department of Justice succeeds in preventing the AT&T-Time Warner merger, the next obvious question is who might buy Time Warner?
"In theory Disney is in the market looking to acquire media assets and TWX has seen interest from others in the past including tech companies like Apple," Venkateshwar suggested. "However, if a vertical deal is blocked by the DOJ, we don't see how management teams could get comfortable pitching a horizontal deal to the DOJ."
Silicon Valley firms could have similar trepidation about trying to buy Time Warner, given the Justice lawsuit.
The tech media powers have even larger audiences than AT&T's DirecTV satellite service, Stephenson argued in the telecoms's media call. "Netflix, they distribute their content to over 100 million customers. Amazon distributes its content to its Prime members—that's estimated to be in excess of 60 million. Google and Facebook, they reach and distribute content to literally billions of customers," Stephenson said. "And the government contends that AT&T, with 25 million TV customers, and Turner, with a single-digit share of all media watched, will have unlawful market power ... this defies logic, and it is unprecedented."
It could take four to six months for a decision to be reached, UBS analyst John Hodulik estimated in a report. "We believe this lawsuit casts uncertainty about other M&A deals that have been announced or are circulating in the press," he wrote. Such deals include those between Discovery Communications Inc. (DISCA) and Scripps Interactive Inc. (SNI) ; Walt Disney Co. (DIS) and Twentieth Century Fox (FOXA) ; and Comcast Corp. (CMCSA) and Fox, Hodulik noted. Most of those deals, said Hodulik, "would result in greater market concentration on the distribution or content side."
Any CEO contemplating a major media deal would risk winding up in Stephenson's shoes. "To take suddenly, without any notice, and just upturn 50 years' of precedent on a transaction like this can have nothing but a freezing effect on commerce in general," the AT&T chief warned in Monday's call.
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