Feds to Media Moguls: No More “Anything Goes” M&A Deals

At a town hall in June with 150 HBO employees, a video unspooled with talent asking new WarnerMedia CEO John Stankey about the $85.4 billion merger of AT&T and Time Warner. “Hi John,” Bill Maher began. “Now that you figured out how to get the merger past the Justice Department, the next time Donald Trump sues me, I can use your lawyers, right? Because I think we all know there will be a next time.”

Turns out the HBO host’s query was prophetic. On July 12, Trump’s Department of Justice appealed a court ruling that AT&T could acquire Time Warner. In the unlikely event the DOJ wins this time, it would mean the messy unwinding of a merger that already is being implemented. Time Warner shares have been delisted and stockholders have been paid their merger-approved premiums; CEO Jeffrey Bewkes is gone (with a golden parachute Equilar estimates could swell to $434 million), as are many of his lieutenants. The name of the company doesn’t even exist now.

If the DOJ convinces a three-judge circuit-court panel over the next three to six months, AT&T’s lead appellate lawyer, Peter Keisler (a former U.S. acting attorney general under George W. Bush), would likely appeal to the U.S. Supreme Court, dragging out the process until 2020 and putting the fate of the merger in the hands of a potentially Trump-friendly Supreme Court. But before then, the DOJ’s actions already are causing ripple effects throughout an industry that is bracing for more consolidation but might suddenly get gun-shy.

It wasn’t supposed to be this way under Trump, who promised less regulatory scrutiny of businesses. But between the AT&T case and a June 16 proclamation from FCC chairman Ajit Pai that he has “serious concerns” about Sinclair Group’s $3.9 billion acquisition of Tribune Media, “This is certainly not the ‘anything-goes’ M&A regime that many thought we had,” says analyst Craig Moffett.

Arguably the largest immediate impact involves the ongoing saga of who will purchase the bulk of 21st Century Fox, including its TV and film studio and networks. On June 20, Disney outbid Comcast’s $65 billion counter­offer with one for $71.3 billion, but Comcast can still bid higher if CEO Brian Roberts chooses. Many believe he won’t, because the DOJ sent a strong signal that it might not approve a Comcast-Fox partial merger involving a large distributor of cable TV and broadband access, both of which are heavily regulated.

Indeed, the crux of the DOJ’s case against AT&T-Time Warner was that a combined entity would be too powerful as both creator and distributor of content. “We have a much better opportunity in terms of approval and the timing of that approval than Comcast does,” Disney CEO Bob Iger said June 20.

The DOJ’s appeal increases risk for Comcast’s bid for Fox “and pushes out the timeline for regulatory approval so as to force Comcast to make a prohibitively high bid,” says analyst Matthew Harrigan. “This is a clear gift to Disney,” echoes Moffett. “Fox’s board has been looking for a justifiable reason to choose Disney over Comcast.”

For now, the DOJ has blessed the Disney-Fox deal if Disney agrees to divest of Fox’s regional sports networks, which would create a near-monopoly if they were combined with Disney’s ESPN. There’s also the matter of European pay TV giant Sky: Comcast wants to purchase the whole thing for $34 billion and Fox also wants to buy the 61 percent it doesn’t already own. Some speculate that in the wake of the DOJ appealing the AT&T ruling, Comcast’s Roberts may bow out of the bidding for Fox and focus on Sky in a quest to rob Disney of an interest there should the Disney-Fox deal close.

To some extent, the DOJ on Wednesday teased what its appeal argument would be by writing in a filing that “the district court rejected fundamental principles of economics, creating uncertainty that will have an outsized effect on vertical merger analysis.”

What this apparently means is that Turner is in a better spot to extract higher fees from cable and satellite distributors now that it is owned by AT&T, the parent of DirecTV.

“The economics of bargaining is not new or out of the mainstream, as even a defense expert acknowledged. Until the district court’s decision, it has been uncontroversial in merger assessment,” the DOJ said in its Wednesday filing.

Insiders also say some regulators were irked by a July 2 announcement of a $5 monthly price hike for DirecTV Now, AT&T’s subscription streaming service, since AT&T promised that the merger would benefit consumers, not cost them more.

When it comes to Warner­Media, the DOJ’s muscle-flexing could be mere posturing, or it could have some teeth to it. Perhaps the agency is seeking further concessions, like an outright sale of Turner, the unit that includes CNN, which Trump has been so critical of that some suggest the DOJ is revisiting the merger to placate the president. Jennifer Fritzsche of Wells Fargo says her regulatory contacts believe the appeal is “viewed more about the DOJ earning political capital than necessarily wanting to unwind” the merger, even if some at the DOJ would like WarnerMedia to be compelled to sell Turner.

As for Hulu, it remains 30 percent owned by Disney, 30 percent by Fox, 30 percent by Comcast and 10 percent by AT&T, and there are some regulators who would wince at allowing Disney to own 60 percent, says Michael Pachter of Wedbush Securities. While Facebook, Google or another digital dynamo could swoop in for a stake in Hulu, he opines that a deal should be struck for each of the three remaining owners after a Fox transaction to take an equal 33.3 percent stake in the streamer.

“Their goals are aligned, and they have an incentive to shift their streaming content to Hulu instead of to Netflix,” says Pachter. “Why license to Netflix for $3 billion to $5 billion a year and let Netflix capture all of the value when they could license to Hulu and capture the same value themselves?”

And while most analysts see the DOJ losing its appeal, Moffett suggests Judge Richard Leon may have dismissed too quickly the notion that Turner would take advantage of AT&T’s DirecTV to boost its carriage fees: “We’re not as sure as everyone else.”

A version of this story first appeared in the July 18 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.