Fox Sale Talks Clouded by AT&T-Time Warner Lawsuit

Lachlan, Rupert and James Murdoch - 2016 St. Bride's Church Service - Getty - H 2017
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Multiple suitors are interested in purchasing some of Fox’s assets, but the lawsuit against the AT&T-Time Warner merger seems like a clear signal that each of those could have a rough time as well.

The Department of Justice’s lawsuit to block AT&T’s $85.4 billion acquisition of Time Warner is likely to hinder recent negotiations involving 21st Century Fox and its plethora of suitors, though some observers say it could put Sony in the catbird seat since it would likely face the fewest regulatory hurdles.

Insiders say that Sony is interested in acquiring roughly the same assets in which Disney first expressed an interest, which include the film studio and some of Fox’s non-news cable channels. But Sony could also acquire Fox’s broadcast network, home to The Simpsons and Empire, while Disney legally could not, since it already owns ABC.

Regulators might also find it problematic for Disney and Fox to strike any deal that would combine the two movie studios, since it would give one company a nearly unprecedented share of the domestic box office. If Disney and Fox were under one roof a year ago, it would boast market share of nearly 40 percent, while a Sony-Fox hookup would have led to a far more palatable — from a regulatory perspective — 21 percent of the box office.

That’s not to say Disney is out of the running quite yet, argues Tom Eagan of Telsey Advisory Group, because it has much to gain if it could purchase some of Fox’s assets, so it might not give up too quickly.

“Despite recent franchise revitalization (i.e., Star Wars) and successful overseas theme park openings (i.e., Shanghai, China), the Street remains concerned about declining ESPN subs,” Eagan wrote in a research note. “With the Fox cable nets FX and Nat Geo, Disney could diversify its U.S. TV assets while expanding TV operations abroad with Sky and Star India.”

Beyond Sony and Disney, Verizon and Comcast are interested in purchasing some of Fox’s assets, but the lawsuit against the Time Warner-AT&T merger seems like a clear signal that each of those could have a rough time with the DOJ, as well.

“One has to question if AT&T has issues with a vertical merger then it may call into question many other vertical mergers possibly being considered,” said Wells Fargo analyst Jennifer Fritzsche. “This would clearly include — but is not limited to — other telecom and content deals.”

Added Eagan: “With the DOJ taking a stand against vertical mergers, a Comcast bid for Fox assets would appear to face a difficult antitrust review.”

And Charlie Gasparino on Fox Business Network, owned by Fox, confirmed Tuesday that Rupert Murdoch and his sons, Lachlan and James, “are closely monitoring the DOJ action on Time Warner-AT&T to determine exactly how they’re going to proceed with planned asset sales.”

He added that the lawsuit “complicates it for Mr. Murdoch, complicates it for potential suitors, mainly Comcast and Disney,” though he did not mention Verizon.

Ironically, some suggest that the DOJ lawsuit could throw Time Warner back into the arms of Fox, as the Murdoch-controlled company made an attempt at a merger in 2014 but was rebuffed.

Paul Gallant of Cowen Washington Research Group says a Fox-Time Warner merger is “doable” from a regulatory standpoint in part because Murdoch is friendly with President Trump (whereas there are rumors that Trump’s antithesis toward CNN is playing a role in the DOJ’s refusal to bless the AT&T-Time Warner deal).

Any deal involving Fox would also need FCC approval, since the company has broadcast licenses, and the FCC can be even more restrictive than the DOJ. While AT&T is resisting the DOJ’s demand that CNN be sold before the telephone company is allowed to merge with Time Warner, Gallant opines that Fox would be glad to sell CNN in order to gain approval to merge with Time Warner.

Gallant likens a potential Time Warner-Fox merger with the 2012 merger of Universal-EMI, which was approved even though it combined two of the top four music publishers. “Together, they weren’t likely to produce higher music prices for consumers,” Gallant explained.

But any way you slice it, big mergers and acquisitions are dead for the time being.

“It's hard to see any meaningful, new media M&A deals being launched with this suit outstanding,” B. Riley FBR analyst Barton Crockett said. “But once the suit is resolved, we would expect M&A talk to reignite.”

And if the merger is successfully blocked, it could be murder on already troubled media stocks, some of which are in part propped up because they are seen as takeover targets.

“If the DOJ successfully blocks AT&T's bid, [stock] valuations across the space would likely fall due to the perceived increased difficulty of M&A,” Cowen analyst Doug Creutz said in a Tuesday report called “Pass the popcorn for ‘Department of Justice League,’” a pun about Time Warner’s current theatrical release, Justice League.

“Sector share prices have run up in the past two weeks due to news reports that Fox may be in M&A discussions with multiple bidders,” said Creutz.