Tuesday’s landmark AT&T-Time Warner merger ruling could reverberate for years to come by turning the media industry into a land of fewer giants.
U.S. District Judge Richard Leon decided that AT&T could complete its $85.4-billion takeover of Time Warner Inc., which owns HBO, CNN, TNT, TBS and Warner Bros. AT&T already is the nation’s largest pay-TV provider and the deal — which is expected to be finalized by June 20 — will transform AT&T into one of Hollywood’s biggest players with “Superman” and “Harry Potter” movie franchisesand such television shows as “Westworld” and “Big Little Lies.”
The Justice Department sued to block the merger, but after a six-week trial the judge said federal prosecutors, led by antitrust chief Makan Delrahim, failed to prove that the merger would harm consumers. His ruling signaled a more favorable climate in Washington for blockbuster combinations and probably will damp the government’s enthusiasm to pursue similar lawsuits, experts said.
“It will certainly prompt additional media mergers,” George A. Hay, a professor at Cornell Law School, said Tuesday.
Comcast Corp. Chief Executive Brian Roberts is expected to be the first to pounce. Comcast could announce as early as Wednesday that it is making another run at buying much of Rupert Murdoch’s 21st Century Fox.
“There's definitely going to be a renewed bidding war for Fox’s assets,” predicted Mark Ostrau, an attorney who specializes in antitrust law at Mountain View, Calif., firm Fenwick & West.
Philadelphia-based Comcast is expected to offer more than $60 billion in cash for Fox, which would top an earlier bid by Walt Disney Co. Comcast tried last fall to scoop up the Fox assets but Murdoch selected Disney out of concern that Comcast would have difficulty gaining regulatory approval.
“We see Fox as a clear winner following today's ruling,” wrote John Janedis, a media analyst with Jefferies & Co. in a research note. “We think bids from Comcast or Disney could reach as high as $80 billion.”
The ruling, which came just after the market closed, boosted most media stocks. Fox shares, which closed Tuesday at $40.54, jumped 7% in after-hours trading. CBS shares, which closed at $52.38, jumped 5% after markets closed. Comcast shares closed at $32.38 and dropped nearly 3% in after-hours trading. Disney shares, which ended the regular session up at $104.33, dropped about 1.5% on Tuesday evening.
Leon’s decision came nearly 20 months after AT&T unveiled its Time Warner acquisition. Since then, other media companies have announced acquisitions: Discovery Communications this year bought Scripps Networks Interactive, owner of Food Network and HGTV. Television station owner Sinclair Broadcast Group is trying to buy Tribune Media, which owns such prominent stations as KTLA-TV Channel 5 in Los Angeles. Viacom has also explored merging with CBS, and other Hollywood players including Sony Pictures Entertainment and Santa Monica-based Lionsgate could be up for grabs.
Media companies are looking to bulk up to better compete with such deep-pocketed tech companies as Netflix, Amazon and YouTube that are encroaching on their turf. Murdoch, for example, has said his decision to sell much of the media empire he built was prompted by fears that Fox would be too small to effectively compete.
However, legal experts cautioned that Leon’s ruling would not open the floodgates for mergers.
There are two main types of mergers. AT&T’s proposed purchase of Time Warner is known as a vertical merger because the two companies operate in different parts of the supply chain. Time Warner produces movies and television shows while AT&T, with its DirecTV and U-Verse television services, distributes programming to consumers.
The Justice Department probably will continue to scrutinize so-called horizontal mergers, which involve two direct competitors — such as Disney and Fox.
“The opinion says nothing about the merger of two major content suppliers or two major distributors,” Hay said. “The DOJ’s bread-and-butter is reviewing horizontal mergers, and this doesn’t change that.”
Ostrau, the Fenwick & West attorney, agreed with Hay’s assessment.
“It's not open season for everyone else,” Ostrau said. “Each deal is going to have its own issues.… It would be irresponsible for others in the industry to think they have a free pass.”
Ostrau suggested that a Comcast bid for Fox might face a rocky regulatory road because Comcast owns NBCUniversal, which competes with Fox. Both own major movie studios, television production capabilities, regional sports networks and general entertainment TV channels.
“It’s not as clean of a deal because Comcast and Fox do have competing assets,” Ostrau said. “Horizontal deals, deals that involve a combination of competitors, continue to be risky.”
Politics might also be a factor, one prominent analyst said. There has long been speculation that the Justice Department brought its suit because of Trump’s longstanding disdain for CNN. Trump, an avid Fox News viewer, called Murdoch late last year to congratulate him on his deal with Disney.
“One unusual factor to consider in this triangle between Comcast, Disney and Fox, however, is how politics tilts the scale in one direction or another,” Barclays securities analyst Kannan Venkateshwar wrote in a research report.
He noted that just last week, Delrahim seemed to suggest that a Disney-Fox deal may not face major opposition from the government.
“Such commentary indicates that in the Trump administration, political appointees at the DOJ’s front office may have a bigger say in some of these deals than the staff, which could make the approval process a lot more unpredictable for pending deals,” Venkateshwar wrote.
For AT&T CEO Randall Stephenson, Leon’s decision was a major victory. Stephenson’s reputation has been on the line, given his mixed track record on mergers. The company in 2011 withdrew its bid to buy rival T-Mobile in the face of government opposition. In 2015, AT&T succeeded in buying DirecTV just as cord cutting began to accelerate.
Stephenson has made a huge bet on transforming the Dallas-based phone company, the nation’s second-largest mobile phone provider, into an entertainment behemoth. He plans to use data from DirecTV and mobile phone subscribers to figure out what shows are popular with consumers. Those insights could help HBO and Turner executives make decisions about what type of shows to produce. AT&T also plans to share that information with advertisers so they can better tailor their commercial messages.
Stephenson hopes that content will give the company an advantage over rivals such as Verizon Communications and Sprint, which is trying to combine with T-Mobile. Time Warner agreed to the merger because it lacks direct relationships with the bulk of its customers. But AT&T has such ties: more than 100 million cellphone customers and 25 million pay-TV subscribers in the U.S.