‘‘Winter is coming” may be the ominous tagline for HBO’s hit show Game of Thrones, but for parent Time Warner’s pending merger with AT&T, winter is already here. More than a year after the two corporate giants unveiled their $108.7 billion merger plans, a distinct chill has enveloped the union of the largest pay TV distributor and the second-largest content provider, brought on by what many perceive as strong signals from the White House that the deal, once expected to be a shoo-in through the regulatory approval process, is now facing very real hurdles just steps from the finish line.
Media outlets were abuzz last week as reports flooded in that the U.S. Department of Justice, charged with determining whether the AT&T-Time Warner merger would violate antitrust laws, was asking that the combined company divest either its Turner cable network unit or its DirecTV satellite-television operation. The Turner request was most curious, or perhaps revelatory, because it is the home of CNN, the cable news network that President Donald Trump has excoriated in public statements and on his Twitter account as “fake news.”
While the focus is on CNN and Turner, the broader implications — that a sitting president is trying to negatively influence a merger involving a news organization that has been critical of him — are even more chilling. While much of the recent media focus has been on CNN, if the merger is successfully blocked it would send a strong message to media companies that have been waiting for this deal to close to open the merger floodgates.
In a research note, Barclays media analyst Kannan Venkateshwar noted that if AT&T walked away from the deal, other companies such as The Walt Disney Co. or technology companies like Apple would be logical suitors. Even 21st Century Fox, which attempted an $80 billion hostile takeover of Time Warner in 2014, only to be rebuffed, could make a new deal pitch. But the government’s stance may put a damper on any of that. (Last week, Fox was considered to be a takeover target by Disney; read Would a Mouse Eat a Fox?)
The government, in theory, is concerned about media companies becoming too big. AT&T could raise the price of HBO for rivals, create exclusive programming or even refuse to sell to rivals such as Dish Network.
“There are good reasons for the Justice Department to be concerned about this merger,” Columbia Law professor Tim Wu wrote in The New York Times. But “the unfortunate fact is that Mr. Trump has engendered so much distrust in government that everything that any federal agency does these days seems questionable,” he added. Wu said the Justice Department should do a better job of “explain[ing]its concerns about the merger to the public and to Congress.”
Chilling Effect
If a vertical deal such as this (distribution and content) is blocked by the Justice Department, analysts don’t see how other media companies would get comfortable pitching a horizontal deal (content plus content or distribution plus distribution).
“Technology companies in theory could increase competition in the distribution market by acquiring media companies,” Venkateshwar wrote. But if the AT&T-Time Warner deal implodes, all bets are off. “Therefore, while we could see multiple buyers in theory, it is tough to believe such a transaction would be attempted without greater regulatory clarity.”
Most analysts see the new conditions as a message from the Justice Department that it will block the merger. Without Turner and its stable of pay TV networks — like TBS, TNT, Cartoon Network, TCM, CNN and truTV — there is little reason to do a deal. And owning content without the distribution that comes from the DirecTV satellite assets — which have more than 20 million subscribers across the country — flies in the face of the original reasoning for the transaction.
AT&T is apparently ready to draw a line in the sand. When reports surfaced that the DOJ claimed that AT&T offered to spin off CNN to get the deal approved, which the DOJ rejected, AT&T chairman and CEO Randall Stephenson fired off what was for him a heated denial.
“Until now, we’ve never commented on our discussions with the DOJ,” Stephenson said in a Nov. 8 statement. “But given DOJ’s statement this afternoon, it’s important to set the record straight. Throughout this process, I have never offered to sell CNN and have no intention of doing so.”
At The New York Times’s Dealbook conference in New York on Nov. 9, Stephenson doubled down on his insistence that CNN was not for sale. He also said he has not felt pressure from the government to sell the network, which may be a case of carefully selecting his words. Early reports on the DOJ’s demands centered on selling Turner, CNN’s parent, or DirecTV.
Related: AT&T’s Stephenson: 'No Intention' to Sell CNN
But Stephenson echoed what others have said regarding a sale of CNN, Turner or DirecTV to win approval of the deal: It makes little sense.
When AT&T officially announced the merger on Oct. 22, 2016, the telco saw huge opportunity in pairing Time Warner’s content with AT&T’s distribution. Stephenson brought home that point again at the Dealbook conference.
“One of the key benefits of putting these two companies together is to stand up a new advertising capability,” Stephenson said. “We have built an amazing distribution platform — 150 million mobile subscribers, the largest pay TV base in the United States, a huge broadband base. There’s a lot of information and data that we think can be used to stand up a new advertising business. Pairing that with the Turner advertising inventory is a really powerful thing, we believe. That’s what we aspire to do. Selling CNN makes no sense in that context.”
But despite Stephenson’s protestations — he also said the Nov. 6 meeting with the DOJ, the fulcrum of all the recent controversy, was “productive” — Time Warner stock continues to sink.
In just the past two weeks, Time Warner shares have dropped nearly 15% from $102.20 per share on Oct. 19 to $87.05 per share on Nov. 9, precariously closer to their price just prior to the deal announcement ($82.99 each) and nearly 20% below the $107.50 per share at which AT&T valued the company for the deal.
Related: Wall Street Looks at Options for Time Warner Assets
If the DOJ decides to block the deal — and indications are that, unless the agency has a dramatic change of heart, it will — the first step will be for the government to file a suit stating that the deal violates antitrust rules. Stephenson said if that is the case, AT&T wants the case expedited to further accelerate the process.
“We are prepared to litigate now,” Stephenson said at the Dealbook conference.
A Justice Department suit to block the deal would be nearly unprecedented: Stephenson said the agency hasn’t challenged and defeated a vertical merger in more than 40 years. It is even more surprising given that the new head of DOJ’s antitrust division, assistant attorney general Makan Delrahim, said months ago that he didn’t see any problems with the merger.
“It reinforced what we thought about the transaction,” Stephenson said of Delrahim’s earlier comments. “He made comments that were exactly what we thought about this transaction going in.”
He added that the Nov. 6 meeting with DOJ was more of a “getting to know you” session, and the next step is to continue the process.
“As you might guess, when you’re doing a big negotiation, you spend a lot of time just getting to know each other,” Stephenson said. “You spend a lot of time trying to understand what the bid/ask is in a transaction like that. I think we had a very productive meeting on Monday. I think we both learned a lot about where each other are. Now we continue this process to see if we can get to a negotiated settlement.”
If the DOJ is pushing for asset divestiture, it would appear to be more in line with the president’s stance on big mergers than the head of the agency’s.
At a speech at the New York University School of Law on Oct. 27, Delrahim said that competitive impact was the main focus for the agency when reviewing mergers.
“That’s an important part of the process, because blocking a procompetitive transaction can be as dangerous as clearing an anticompetitive one,” Delrahim said, according to a transcript on the DOJ website. “The goal should be to promote, not stifle, competition.
“Our role in the antitrust division is the pursuit of justice in the marketplace,” he continued. “When we do our jobs correctly, we protect the competitive process around which our economy is organized and on which the American Dream is premised. And we do so through law enforcement consistent with limited government and the rule of law. It’s a compelling mission.”
Related: FCC's Pai Says DOJ Will Do Right Thing With AT&T-Time Warner
Delrahim’s boss, Trump, has made his stance on CNN clear since his campaign, when in a speech in Gettysburg, Pa., last October he said he would block the AT&T-Time Warner merger because it created “too much concentration of power in the hands of too few.”
Perhaps even more chilling would be implications on past and future deals if the government sues to block the AT&T-Time Warner merger and is successful. Trump has vowed to dismantle Comcast’s 2011 purchase of NBCUniversal. In the same Gettysburg speech, he said that deal created “one massive entity that is trying to tell the voters what to think and what to do.”
Stephenson also downplayed Trump’s role in influencing the DOJ, adding that he has only had contact with Justice officials throughout the merger process. But no one is suggesting that Trump is actively involved in the approval process. Several reports have said that DOJ officials are well aware of the president’s feelings toward the deal, and especially CNN, through his countless Twitter posts and comments criticizing the network.
Shifting Political Winds
But any presidential opposition to the deal could also have the reverse effect. Already several organizations that have publicly opposed the merger because it concentrates too much media power in one entity are beginning to rethink that position.
Free Press, which in the past has said it would back a requirement that AT&T spin off CNN or Turner to decrease media concentration, said it doesn’t approve of such moves if they are merely a manifestation of Trump’s apparent hatred of the news media.
“While there are plenty of good reasons to oppose AT&T’s Time Warner takeover, punishing CNN for trying to hold this administration accountable isn’t one of them,” Free Press president Craig Aaron said last week. “No matter where you come down on this merger, everyone should agree that the government shouldn’t base antitrust decisions or FCC rulings on whether it likes a newsroom’s coverage.”
For its part, AT&T is forcing the government to either go big or go home. In a research note, BTIG media analyst Richard Greenfield noted that AT&T certified compliance with the DOJ on Nov. 6, which started a 30-day shot clock for the government to make a decision either way. If litigation is filed, it could go on for at least four to five months even at an expedited rate, meaning AT&T would miss its earlier target of a year-end close and would be hard pressed to complete the deal by April 22, the official termination date for the merger — and Stephenson’s birthday.
The AT&T chief claimed he didn’t know about compliance certification, but expressed his frustration with the process.
“We need this to move along,” Stephenson said. “This has been well over a year for a vertical merger, and we each need to take actions that will get this to closure. Either we settle or we litigate, one of the two. I think we’re both aligned on that.”
Washington bureau chief John Eggerton contributed to this report.
