AT&T vowed to fight the U.S. Department of Justice’s move Monday to block its $108.7 billion merger with Time Warner Inc., adding that the government has no legal grounds to stop the deal, which has been slogging through the federal anti-trust approval process for more than a year.
“We are going in to this to win,” AT&T chairman and CEO Randall Stephenson told reporters in a press conference Monday night. “We are very confident and we intend to win.”
Stephenson said on the call that AT&T has “offered concrete and substantial solution” and will continue to offer them to get the deal closed. He declined to say what those solutions were.
AT&T first announced its agreement to acquire Time Warner in a deal valued at $85 billion ($108.7 billion including debt) on Oct. 22, 2016. At the time, the companies believed the deal would take about a year to complete.
The deal would combine the largest distributor – AT&T with about 25 million pay TV customers – and the second largest content provider. Time Warner includes the Warner Bros. movie studios, and Turner Networks including content brands like CNN, Home Box Office, Cartoon Network, TNT, TBS and TCM.
AT&T had been confident that because the merger was a vertical combination – neither company has any competing businesses – it would have easily moved through the approval process. But that became less clear shortly after the deal was announced, when then-presidential candidate Donald Trump said he would block the deal if he were elected.
When Trump did win the election, business leaders believed he would back off on his promise and let the deal through. But Trump has battled with CNN since becoming President – he regularly calls the network “fake news” – and it became clearer in the past month that the deal may face some resistance from the government.
Stephenson had contended earlier that CNN divestiture was never put on the table as a condition of the deal, but he again said at the Monday press conference that selling the network was not an option.
“There has been a lot of reporting and speculation whether this is all about CNN,” Stephenson said. “Frankly, I don’t know. But nobody should be surprised that the question keeps coming up, because we witnessed such an abrupt change in the application of antitrust law here. The bottom line here is we cannot and we will not be party to any agreement that would even give the perception of compromising the First Amendment protections of the press. Any agreement that results in us forfeiting control of CNN, whether directly or indirectly, is a non-starter. We believe quite strongly that any divestiture of AT&T assets or Time Warner assets is not required by the law. We have no intention of backing down from the government’s lawsuit.”
Earlier this month, newly appointed Assistant Attorney General Makan Delrahim, head of the DOJ’s anti-trust division, had hinted that he would apply structural conditions rather than behavioral conditions to mergers, and word leaked to several news outlets that the government would seek a divestiture of either Turner or DirecTV to get the deal approved.
Related: Makan Delrahim Lays Groundwork for Divestiture
In a statement, Delrahim said the merger would “greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.”
AT&T has argued all along that the DOJ has no precedent to stop the merger – neither AT&T nor Time Warner compete in any business and the deal would mot remove a top competitor from the industry.
“Today’s DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent. Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently,” AT&T Senior EVP and General Counsel David McAtee II said in a statement. “Our merger combines Time Warner’s content and talent with AT&T’s TV, wireless and broadband distribution platforms. The result will help make television more affordable, innovative, interactive and mobile. Fortunately, the Department of Justice doesn’t have the final say in this matter. Rather, it bears the burden of proving to the U.S. District Court that the transaction violates the law. We are confident that the Court will reject the Government’s claims and permit this merger under longstanding legal precedent.”
Now the DOJ will have to prove that the deal violates anti-trust law. That won’t be easy. The DOJ hasn’t successfully blocked a vertical merger in 50 years. And the last time it attempted to block a vertical deal – U.S. v. Hammermill Paper Co. in 1977 – it was rejected by the court.
But the government was successful during the Nixon Administration of blocking Ford Motor Co.’s purchase of Autolite, one of two independent sparkplug manufacturers in the country at the time. The government was successful in that case because it involved static technologies, high concentration levels and barriers to entry, according to AT&T.
“In contrast AT&T and Time Warner are both in wildly competitive, fluid and innovative industries with new entrants on a daily basis,” AT&T said in a statement. “Neither company has market power.”
But the lawsuit could delay the process long enough for both parties to call it a day and walk away from the transaction – much like Comcast did in 2015 when it discovered the DOJ would contest its merger with Time Warner Cable. While this merger is different – Time Warner Cable was the second largest distributor in the country and the combined company would have huge dominance in broadband nationally – some have argued it would place too much power in once company’s hands.
The government has cited one case where its opposition helped scratch a big deal – Semiconductor maker Lam Research’s failed purchase of KLA Tenecor in 2016. AT&T argued that the DOJ did not officially file a suit to block that deal, but like the Comcast-TWC merger, let it be known that it would oppose the union. The parties simply walked away from the deal. And that may be the DOJ’s whole point.
But at least for now, AT&T seems adamant about having its day in court.
“Voluntary abandonment is not precedent,” AT&T argued in a statement. “No court decided anything because there was no case.
Daniel Petrocelli, retained counsel from O'Melveny & Myers for both AT&T and Time Warner said at the press conference that he does not expect the suit to drag on in the courts.
“This is not a case that is going to drag on for months and months,” Petrocelli said, adding that he was hopeful a trial could proceed in as early as 60 days. “The DOJ will be hard pressed to tell the court they are not ready.”
AT&T cited hundreds of vertical mergers that have been approved by DOJ since the Ford deal, including 2011’s merger of Comcast and NBC Universal. While that deal was loaded with conditions –many of which will expire next year, speculation has been high that the DOJ believes it may have missed the boat on that deal, allowing Comcast to amass too much content power. According to some observers, the agency doesn’t want to make the same mistake with AT&T-Time Warner.
But whatever the government feels about big deals – one worry is that AT&T would make some content from Time Warner exclusive to its own distribution properties – it may have little choice. AT&T claims there
“The critical and uncontested fact is that this merger neither eliminates any competitor nor increases concentration in any market,” AT&T said in a statement.
Media watchdog groups had been opposed to the deal from the start, but have expressed some trepidation over the reports that the action could be at least in part motivated by the President’s own bias toward CNN. Many have said that would create a dangerous precedent.
“Blocking this merger is the right thing to do — and we hope the Justice Department is doing it for the right reasons,” Free Press CEO Craig Aaron said in a statement. “This deal would give AT&T way too much power to undercut competitors and raise costs on TV viewers and internet users everywhere.
“…It’s refreshing to see the Justice Department doing something about this deal,” Aaron continued. “However, we remain very troubled by President Trump’s threats to punish outlets like CNN that have aired critical coverage of the administration. The Justice Department must demonstrate that Trump’s saber-rattling has nothing to do with this suit. It could start by giving the same level of scrutiny to other mega-deals like Sinclair’s proposed merger with Tribune. But the bottom line is that the public would be best served if this merger is scrapped.”
Time Warner shares were down by about 1% on Nov. 20 and were priced as low as $87.15and as high as $88.50 in after-hours trading.
Some observers have warned that the DOJ action could put a chill on future media mergers, especially those involving companies that have been critical of the president. Stephenson agreed.
“I would suggest that this lawsuit has the whole world questioning what they will, can and cannot do,” Stephenson said. This throws a huge degree of uncertainty to anybody contemplating joint ventures, anybody contemplating M&A. That’s one of the key concerns about this. 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.”
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