WASHINGTON — AT&T’s $85.4 billion proposed merger with Time Warner can proceed and does not pose antitrust problems, a federal judge ruled on Tuesday.
U.S. District Judge Richard Leon announced his decision at a hearing at the federal courthouse, gathering all of the parties together for a dramatic coda after a six-week trial.
The decision was definitive, as Leon read from his opinion in the courtroom and concluded that the government had failed to prove that the merger would substantially lessen competition.
The Justice Department has not announced whether it will appeal the case. After he read from his opinion, Leon also strongly suggested that the government not seek a stay pending an appeal.
He said it would be a “manifestly unjust” outcome of the case if they received a stay that further delayed the merger, costing both companies. He noted the $500 million breakup fee, with the June 21 deadline for completing the transaction.
Makan Delrahim, the chief of the Antitrust Division, told reporters afterward that he was “disappointed. We obviously don’t agree.” He said they are still reviewing the opinion, which is 170 pages.
“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 General Counsel David McAtee said in a statement. “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. We look forward to closing the merger on or before June 20 so we can begin to give consumers video entertainment that is more affordable, mobile, and innovative.”
The Justice Department’s Antitrust Division challenged the vertical merger by arguing that it would ultimately cost consumers. The crux of the DOJ’s argument was that AT&T-Time Warner would use its increased leverage as a bulked up entity to extract higher carriage fees for channels like TBS, TNT and CNN.
The ruling has tremendous implications for future media mergers, as public interest groups and Wall Street analysts predict that it will clear the way for greater consolidation and combinations between content and distribution.
Comcast, for instance, is weighing a rival bid for many of the assets of 21st Century Fox, hoping to usurp The Walt Disney Co.’s agreement to purchase the media properties. Verizon is seen as likely on the hunt for a key content player, and there has long been speculation that a big tech company, like Google, Apple or Facebook, would try to acquire a traditional Hollywood studio.
UBS’s John Hodulik wrote last week that a favorable ruling for AT&T could serve as a “green light” for other transactions. “This decision will likely serve as the litmus test for other potential M&A and has broad implications for stocks in the cable, telco and media space,” he wrote in a research note.
Gene Kimmelman, president and CEO of the public interest group Public Knowledge, said earlier this month that the impact of an AT&T victory in the case will be “enormous.” “You are going to see an explosion of vertical mergers — three or four [companies] that gobble up the most valuable properties in the media ecosystem.”
He also predicted that the tech sector would accelerate its vertical integration, but he doesn’t think that will be via a media company. He described what he saw as a “territorial split,” in which the media sector protects its base through consolidation and tech companies see an opening “to entrench themselves in their current businesses and block out potential rivals.”
AT&T and Time Warner had set June 21 as the date to complete the deal.
The Justice Department can appeal the case, but that doesn’t necessarily mean that it will delay the transaction. To stop the merger from going forward pending an appeal, the government would likely have to prove that there was a good chance they will succeed in their case and the merger moving forward would cause irreparable harm, Kimmelman said.
“That is a heavy lift. It may stretch things out somewhat, but I am not sure it will stop the transaction,” Kimmelman said.
AT&T and Time Warner announced an agreement for a $85.4 billion merger on Oct. 22, 2016, but the deal quickly got swept up in the presidential race. Donald Trump said that he would block the merger because it was “too much concentration of power in the hands of too few.”
After Trump was elected, many Wall Street analysts believed that the transaction would ultimately pass antitrust scrutiny with a new Republican administration in charge. Before Delrahim was nominated as the new antitrust chief, he said on Canadian TV that he didn’t see the merger as a “major antitrust problem.” Delrahim later noted in that same interview that the transaction would raise concerns.
Less than two months after he was confirmed, Delrahim led the Antitrust Division in challenging the transaction in court. The division filed suit on Nov. 20, 2017, claiming that the merger would give AT&T-Time Warner increased leverage against rivals, driving up the prices competitors pay for the Turner networks. It also claimed that the combined company could withhold rivals’ ability to use HBO, the Time Warner owned premium service, as a promotional tool to draw subscribers.
AT&T CEO Randall Stephenson fought back, and characterized Trump’s opposition to the transaction and his animosity toward CNN as the “elephant in the room.” In a pretrial hearing, AT&T-Time Warner’s legal team sought to pursue a line of defense that they were unfairly singled out by the DOJ and the White House for antitrust enforcement, given Trump’s attacks on CNN. Leon rejected AT&T’s efforts to gain access to key documents for possible introduction at the trial.
The six-week trial — perhaps the most closely watched antitrust case in a generation — featured testimony from Stephenson, Time Warner CEO Jeff Bewkes and a slew of other corporate executives from the company and from rivals. But much of it hinged on the Justice Department’s ability to prove that the merger would harm consumers.
The DOJ relied on a number of experts to show that pay TV customers would face higher bills — by their account $463 million per year. Chief among them was Carl Shapiro, economist at the University of California at Berkeley, who faced perhaps the most contentious cross-examination from AT&T-Time Warner’s legal team, led by Daniel Petrocelli.
Petrocelli attacked Shapiro’s methodology for concluding that the merger would result in a price increase of 45 cents per month per pay TV subscriber. AT&T’s legal team later produced their own witness, Dennis Carlton of the University of Chicago, who claimed that Shapiro’s model was “theoretically unsound.”
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