With closing arguments set to begin in the antitrust trial regarding the AT&T Inc. (NYSE: T) and Time Warner Inc (NYSE: TWX) merger, most pundits and yours truly believe that AT&T has absolutely crushed the Department of Justice in court. I don’t imagine it will take the judge very long to come to a decision in the trial, and I expected he will permit the merger to go through. The merger deadline, which has already been extended, is June 22. I believe the judge will rule before that date.
Remember that the DOJ has the burden of proof that the merger will somehow be anticompetitive. The DOJ put most of its eggs in the basket of one witness, economist Carl Shapiro. Shapiro had the goal of convincing the judge that there would be additional cost passed on to consumers as a result of the merger. However, there have always been three major flaws in his argument. One of these flaws was made even more abundantly clear during rebuttal.
To quickly review, the argument is that by controlling Turner Broadcasting content, which would air on AT&T subsidiary DirecTV, AT&T would attempt to extract significantly higher carriage fees from other distributors for that programming. The first problem with this is that the entire reason for the merger, according to both parties, is to enhance advertising revenues. If AT&T charged other distributors too much for that programming, and the distributors were to actually not carry it, AT&T would lose a tremendous amount of revenue because advertisers would not pay as much for fewer eyeballs.
The second problem is that it assumes Turner’s programming is somehow “must-have” programming. That simply isn’t true with all of the different programming alternatives these days. And, because Turner programming could be streamed à la carte on other services, consumers are not going to cut their cable cord if they can’t get their turn reprogramming.
The final problem is that Shapiro failed to make his case that costs would be significantly higher for consumers. Not only did he try to argue that there would be an increase of $571 million in aggregate costs for consumers, but AT&T countered that would only come out to about $0.45 per customer. Then, during rebuttal, Shapiro was forced to admit that the model was not only weakly structured, but after inputting more accurate data, the average monthly increase cost to consumers might only be as little as $0.23.
I never understood why the DOJ went to the mat on this to begin with.
All that being said, it’s possible the two sides could come to a settlement, or that the judge may attempt to create some kind of concession that AT&T must make for the merger close. I don’t think it would involve a divestiture of CNN, or of Turner system, or of DirecTV.
The judge may require some sort of arbitration process in the event of a carriage dispute. This could take the form of both sides submitting a proposal that an arbitrator chooses between, or something that isn’t quite as blind. In other words, it becomes more of a negotiation within the context of an arbitration. That angle would also probably require the disputed content to remain on air during the arbitration so consumers do not experience programming blackouts.
Bottom Line on T-TWX merger
TWX stock closed at $94.60 on Friday. The original take-out price, which is subject to some variance based on the price of AT&T stock, was $107.50. At Friday’s closing price for AT&T of $33.10, the deal would close at a price of $101.31.
Thus if you believe as I do that the merger will go through, there appears to be a minimum of $6.50 upside in Time Warner’s stock from here. It could be as much as another $6 on top of that.
I own a lot of Time Warner calls, in case you’re wondering.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Meyers is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns calls on TWX stock. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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