AT&T, Time Warner Cleared to Merge - Broadcasting & Cable

AT&T, Time Warner Cleared to Merge

Judge Leon rules against DOJ; deal expected to close by June 21 deadline
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A federal district court has ruled that AT&T and Time Warner can get together, making the Trump administration's Justice Department the loser in the high-profile legal case.

That came in a highly anticipated announcement by D.C. District Court Judge Richard Leon, who had signaled weeks ago that the decision would be rendered at his court's version of high noon: 4 p.m. Tuesday (June 12).

The judge concluded in a 172-page decision that DOJ "failed to meet its burden to establish that the proposed transaction is likely to lessen competition substantially," and thus declined to enjoin the merger.

He found the government’s evidence unpersuasive and itswitness testimony unsupported, or even contradicted, by evidence.

Leon concluded that government had failed to clear the first hurdle of showing that the proposed merger is likely to increase Turner's bargaining leverage in affiliate negotiations, so did not have to consider whether such increased leverage would lessen competition and violate antitrust laws.

Leon also rejected the assertion that the combined company would likely restrict HBO as a promotional tool in order to harm AT&T's distribution rivals and thereby lessen competition in the marketplace."

He said the government had failed to meet its burden of proof in two ways on the assertion that HBO promotion would be withheld from competitors. First, it did not show that the merged company would have any [emphasis his] incentive to foreclose rivals' access to HBO-based promotions, he said, and second, it failed to establish that HBO promotions are so valuable that withholding or restricting them would drive customers to AT&T.Or, put another way, he said, the government has failed to show that the substitutes for HBO "are inferior or inadequate, or more costly."

Justice Antitrust Chief Makan Delrahim was in the courtroom, according to CNN, and said he was disappointed in the decision and that the pay TV market would be less competitive. He said he would closely review the court's opinion, but did not immediately say the government would seek a stay or appeal, though the judge warned against the former after knocking down the government's case, saying it was too speculative

“We are disappointed with the Court’s decision today," said Delrahim in a statement. "We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner. We will closely review the Court’s opinion and consider next steps in light of our commitment to preserving competition for the benefit of American consumers.”

AT&T has a June 21 drop-dead date for closing the deal, so look for the merger, which has already been approved by the companies' boards, to close quickly. DOJ can file for a stay to try to prevent the deal from being consummated. AT&T said after the ruling it wanted to close the deal on or before June 20.

But the judge flatly stated he would not grant such a stay.

Leon said the parties had waged an epic battle, with each having its "proverbial" day in court (literally 23 days), but that the defendants had won. He warned against the stay as a way for the government to try to do indirectly what it could not do with its arguments, which would be to prevent the merger by the break-up date of June 21 and cost AT&T a $500 million breakup fee. Leon said under the circumstances, he could not and would not grant a stay, though the government was, of course, free to appeal the decision.

“We are pleased that, after conducting a full and fair trial on the merits, the court has categorically rejected the government’s lawsuit to block our merger with Time Warner,” AT&T said. “We thank the Court for its thorough and timely examination of the evidence, and we compliment our colleagues at the Department of Justice on their dedicated representation of the government.”

There were some immediate calls for appeal.

“The DOJ should appeal the decision and ask the D.C. Circuit to overturn Judge Leon’s misguided opinion,” said Lina Khan, director of legal policy for the Open Markets Institute, which hosted a speech by Delrahim only hours before the decision. “An appeal is critical not only for maintaining the existing level of competition in video distribution, but also for ensuring that antitrust remains a strong tool against anticompetitive vertical mergers.”

The merger will combine the distribution muscle of DirecTV and AT&T's broadband service with Time Warner and Turner programming networks including HBO, CNN and high-value regional sports nets.

Related: AT&T-Time Warner Approval Could Create Deal Flood or Famine

The approval is expected to clear the path for further consolidation in the media industry, starting with Comcast’s long-awaited competing bid for 21st Century Fox assets currently pledged to The Walt Disney Co. Comcast has said it is in the advanced stages of making a “superior” cash offer for the Fox properties, including cable channels FX, FXX and National Geographic, movie studio 20th Century Fox, its interest in online video pioneer Hulu and 21 regional sports networks. Disney is expected to fight back hard for Fox.

The decision should be a "green light for Fox, Disney, Comcast," said Adonis Hoffman of Business in the Public Interest and formerly a top FCC official.

As the battle for Fox rages on, other smaller content companies will face increasing pressure to add scale. Discovery, which merged with Scripps Networks Interactive earlier this year, could seek out even more properties to beef up its content coffers. CBS and Viacom, locked in a boardroom battle over recombining those assets, could see a way toward a merger, or seek out additional scale. And standalone programmers like AMC Networks, Hallmark Channel and others could find themselves scrambling for partners. Lionsgate Entertainment, which purchased premium channel Starz in 2016 for $4.4 billion, could be a likely consolidator or a target itself.

For AT&T, the inclusion of Time Warner’s content assets – like TNT, TBS, Cartoon Network, CNN, premium channel HBO and the Warner Bros., film and TV production studios – will feed its existing distribution arms and help create new ones. In addition to its traditional pay TV businesses DirecTV and Uverse, and its over-the-top offering DirecTV Now, AT&T has said it would launch (upon approval of the Time Warner deal) a sports-free wireless offering – AT&T Watch – with the Turner channels and others, for $15 per month to the general public and free to AT&T Wireless customers with unlimited data plans. A DirecTV-branded, broadband delivered offering for about $90 per month also is anticipated. 

The DOJ had said the deal should not be allowed because the combined company would be able to raise prices or restrict access to that high-value programming, including online.

President Donald Trump had threatened, as a candidate, to block the deal, apparently stemming from his dislike of Time Warner's CNN and its coverage of his candidacy. The judge did not allow arguments related to the President's threats to block the deal, but antitrust Makan Delrahim made it clear in a speech Tuesday in advance of the decision that politics had no place in antitrust review decisions.

Related: DOJ's Delrahim Says Speech Tests Have No Place in Antitrust

AT&T and Time Warner said the deal would not unreasonably raise prices and that the combined company would make Turner content available to competitors on reasonable terms and that it would agree to third-party arbitration if anyone complained it was not doing so.

The companies argued throughout the trial, and before it, that the merger would boost competition, because that competition was coming from increasingly powerful edge providers like Facebook, Amazon, Netflix and Google.

While Leon is just one judge in a circuit court, his ruling sends a signal that distributors aren't foreclosed from trying to beef up their programming to compete with those over-the-top players, as long as they do not use that asset anti-competively.

AT&T and Time warner had argued that the government's case was built on "non-probative competitor complaints, irrelevant slide shows," and a theoretical model of harm that collapsed under the weight of "real-world" evidence, then disintegrated upon first contact with real-world events, testimony, and data."

Related: AT&T-Time Warner to Court: DOJ Case Fell Apart

The government's own witness had conceded during the trial that its cost model was off, a point the companies drilled down on in their comments.

Trial lawyer Dusty Hecker, partner and co-chair of the litigation department at Posternak, Blankstein & Lund, Boston, had predicted the victory and also said he expects the government will appeal.

The deal only had to go through one set of regulators. The FCC was out of the picture after the deal was structured so it did not involve any transfers of FCC licenses.

Michael Farrell contributed to this report.

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