FCC's Dismantling of Net Neutrality Could Spur New Wave of Telco M&A
Verizon CEO Lowell McAdam

Not everyone is lamenting the end of net neutrality. 

The Federal Communications Commission on Thursday decided in a 3-2 vote along party lines to repeal net neutrality, an Obama-era rule that prevented internet service providers, such as cable and telecom companies, from blocking or slowing down any websites or apps. Without net neutrality rules, ISPs may be able to charge higher prices and prioritize different types of internet traffic. 

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The ruling could also pave the way for a new wave of dealmaking in the telecommunications industry, according to CFRA Research analyst Angelo Zino. FCC Chairman Ajit Pai and the Trump administration have indicated that they favor a lighter regulatory environment, which has heightened expectations that this would lead to more M&A activity in  a wide array of industries. The dismantling of net neutrality rules is just the latest example of the administration's broader regulatory stance. 

FCC Chairman Ajit Pai said rolling back net neutrality would allow for more investment and innovation around broadband networks.
FCC Chairman Ajit Pai said rolling back net neutrality would allow for more investment and innovation around broadband networks.

Consumer advocacy groups, tech giants and several state attorneys general have said they plan to sue to stop the net neutrality repeal. If net neutrality is successfully dismantled, however, Zino believes that some internet service providers may warm up to M&A as a way to build and prioritize their own content libraries. 

"I think we're entering a period of more convergence going on between the wireless/pay-TV providers and the content providers," Zino said in a phone interview. "It'll be interesting to see if all of a sudden they start prioritizing their own content. Given how much ISPs have fought net neutrality, I think there's a reason for that." 

In prior administrations, media giants were forced to make concessions related to net neutrality in order for the transactions to gain regulatory approval. When Charter Communications Inc. (CHTR) merged with Time Warner Cable for $78 billion in 2016, for example, the companies agreed to several pro-competition concessions, including promising not to impose data caps, launch usage-based broadband pacing or charge interconnection fees. Comcast Corp.'s (CMCSA) $37-billion acquisition of NBCUniversal in 2012 similarly required it to agree to provisions such as agreeing to broadcast major sports events and NBC shows on local stations. AT&T Inc. (T) also had to make net neutrality concessions when it acquired DirecTV for $49 billion in 2015. 

It now seems unlikely that the FCC will be "pounding its fist" on concessions the way that they have in the past, Zino said. 

The M&A floodgates may not burst open just yet, however. Acquisitive media companies may wait on the sidelines for a while to see the outcome of AT&T's landmark $85.4-billion bid for Time Warner Inc. (TWX) , as well as that of Walt Disney Inc.'s (DIS) just-announced plan to acquire of most of Twenty-First Century Fox Inc.'s (FOXA) assets. AT&T and Time Warner are currently embroiled in a legal battle with the Justice Department, which is trying to block the deal. 

Disney is buying Fox's movie studio and 22 regional sports channels, Fox-owned cable channels and its international networks, as well as Fox's stakes in Hulu and Sky.
Disney is buying Fox's movie studio and 22 regional sports channels, Fox-owned cable channels and its international networks, as well as Fox's stakes in Hulu and Sky.

Disney and Fox may have an easier time consummating their deal, however, as President Donald Trump has already given his blessing via a phone call to Fox executive chairman Rupert Murdoch, saying it "could be a great thing for jobs." 

"This pending deal with AT&T and Time Warner says a lot about what kinds of deals can and cannot get through and whether certain concessions are needed," Zino says. "Whether AT&T is forced to sell the CNN business, I think that is extremely interesting and will dictate a lot of what is to come in the coming years." 

As for which media giants might be waiting things out, Zino said he thinks Verizon Corp. (VZ) probably has some M&A plans waiting in the wings that it could pursue after the Time Warner/AT&T and Disney/Fox deals are sorted out. 

"Many people thought Verizon would've made a bigger splash on the content side of things by now," he said. "If the net neutrality repeal stands, I think Verizon, among others, would be more intrigued to own both the distribution and the content side because of the potential power in place." 

Verizon is expected to launch its own over-the-top TV service in the spring of 2018, which would compete head-to-head with AT&T's DirecTV Now, Alphabet Inc.'s (GOOGL) YouTube TV, Sony Corp.'s (SNY) PlayStation Vue and Dish Network Corp.'s Sling TV. Earlier this week, the telco giant said it would re-up its $2.25 billion, five-year agreement with the National Football League to stream live football games. Additionally, Verizon has been doubling down on its focus on digital content and mobile ads through its acquisitions of Yahoo! Inc.'s core assets and AOL Inc. 

Before Disney cemented its deal with Fox, Verizon and Comcast were also rumored to be interested in Fox's film and TV assets.

Verizon has a number of options if it's considering M&A. The company could make a content play by acquiring Dish Network, which has a "treasure trove" of spectrum, as well as an OTT offering, Zino said. Verizon could also try to bid for Charter again, although it already made an offer for Charter in May that was rebuffed. 

ISPs such as Verizon or AT&T could also be sizing up struggling social media platform Twitter Inc. (TWTR) or online radio company Pandora Media (P) as they look to capitalize on the flood of activity around mobile video and online streaming. 

"There are a number of options from an M&A landscape, but I think to some extent it should involve acquiring content," Zino said.

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