Richard J. Leon, the senior U.S. district judge overseeing the epic anti-trust battle between Donald Trump’s Justice Department and AT&T, ended a hearing Thursday with a small piece of advice for the lawyers working on the case: “Get your rest.” The unprecedented standoff had begun in November of last year, when AT&T C.E.O. Randall Stephenson had flown to Washington, D.C., to meet with Makan Delrahim, the Justice Department’s new anti-trust chief, to discuss his proposed $85 billion takeover of Time Warner—a merger that Stephenson fully expected to be green-lighted. Instead, Delrahim demanded that AT&T would either have to exclude Turner Broadcasting, which owns CNN, from the deal, or else part ways with DirecTV, a satellite provider that AT&T had acquired in 2015. Stephenson balked. According to my colleague Joe Pompeo, Stephenson’s response was, we’ll see you in court.
That trial will officially begin on Wednesday, the beginning of a legal fight that could help determine what corporate America can and cannot do when it comes to future mergers and acquisitions. In recent weeks, lots of ink—both real and digital—has been spilled speculating on whether for the first time in 40 years, Trump will be successful in blocking a so-called “vertical” merger between companies that don’t already really compete with one another. More titillating, from the perspective of the press that has descended on the E. Barrett Prettyman Federal Courthouse, forcing Leon to make arrangements for an overflow room, is the alleged political dimension of the case. Inside AT&T and Turner, sources are convinced that the Justice Department is cracking down because of the way CNN—and its boss, Jeff Zucker—has covered Trump. “This is political, this is unprecedented, and the only explanation is political pressure from the White House,” a CNN employee told Pompeo last year. “There’s a contingent here that felt like, you have a litigious, vindictive commander in chief with the opportunity to take a poke at a network he believes covers him unfairly. How did we think this is gonna end?”
From Wall Street’s perspective, however, the date to watch is not Wednesday, but June 21. That’s when Time Warner can contractually walk away from the deal and once again be a free and independent company. My bet is that's exactly what Time Warner would like to do—walk away from the merger—and will do, if somehow the trial itself and the time it takes Judge Leon to decide its outcome extends beyond the first day of summer.
It’s not hard to discern why Time Warner might want to get out of its deal with AT&T. In short, AT&T is getting Time Warner on the cheap. Since AT&T struck the deal for Time Warner in October 2016, the company’s intrinsic value has increased. HBO and CNN are hitting on all cylinders. Warner Bros. has had a string of boffo movies, such as Wonder Woman, Justice League and It, generating more than $5 billion in revenue in 2017 for the second time ever. Time Warner’s 2017 EBITDA—earnings before interest, taxes, depreciation, and amortization, a key valuation metric—increased to $8.2 billion, from $7.6 billion the year before, up nearly 8 percent.
But since the cash and stock deal with AT&T was struck, Time Warner’s stock price has been tied at the hip to AT&T’s by the exchange ratio of 1.437 AT&T shares set in the merger agreement plus another $53.75 per share in cash. At the time, AT&T was advertising that combination at $107.50 per Time Warner share. No matter what Time Warner does operationally, its shareholders are still only going to get $53.75 in cash plus 1.437 AT&T shares, which at the moment is worth about $106.80, although Time Warner’s shares are trading at more than a 10 percent discount to that value reflecting investor doubts that the deal will go through combined with the cost to them of betting when the deal will actually close. When the Justice Department announced last November that it would sue AT&T to block the merger, both stocks got hit, with Time Warner’s tumbling from around $104 a share before the announcement to around $88 afterward. It has since recovered to around $96 a share, as many Wall Street analysts have predicted that AT&T has the better legal argument and will likely prevail in Leon’s courtroom.
But of course no one knows what will happen. And Leon is determined to give both sides a full hearing, although just what evidence he will allow to be presented will be determined during the pre-trial hearings, starting today. Where the trial was once supposed to last around a month, Leon announced last week he now expects the trial to take two months.
The timing becomes very important from Time Warner’s perspective. If the trial takes two months, as Leon has predicted, that puts its conclusion hard against the long Memorial Day weekend. From there, Leon can take as long as he needs to write his opinion. Lord knows synthesizing and analyzing what he hears will be complex and time consuming. Sometimes such legal decisions can take months to decide and to write.
Can Leon get it done by June 21, essentially three weeks after the trial concludes? That’s the central question likely wafting these days through the corridors of the Time Warner executive suites at Columbus Circle in Midtown Manhattan. I suspect many of those executives are hoping Leon needs more than three weeks to decide such a complicated legal case (unless of course it turns out to not be all that complicated).
If June 21 comes and goes without a decision, then the fun really begins. Time Warner will be able to get out of the merger agreement penalty free. Will it? The termination date has already been extended twice. The two parties could extend it again if they want to wait around for the judge’s decision. There is no question that AT&T will want Time Warner to agree to another extension, of course. The big phone company—it used to be Southwestern Bell before it gobbled up the remnants of AT&T and became a data hog—desperately wants Time Warner’s content to send through its pipes, just as rival Comcast has done with NBCUniversal.
But why should Time Warner agree to the extension again? It shouldn’t, and it probably won’t, absent a material financial sweetener from AT&T. Ironically, it could turn out that Trump’s vendetta against CNN could work to the advantage of Time Warner shareholders. They have all the leverage now, given how difficult it will be for Leon to render his decision by June 21. Time Warner could push to get a better deal from AT&T or walk away from AT&T, and go back to running Time Warner independently, while waiting for another suitor to emerge, looking to fill its pipes and distribution network with Time Warner’s increasingly valuable content.
Verizon? Apple? Google? Amazon? Facebook? Possibly all of these—and more—could be interested, for a price in excess of what AT&T has offered, and likely without the same legal hassles. Both Stephenson and Jeff Bewkes, the C.E.O. of Time Warner, are savvy dealmakers. They’ve been around a long time. But as one Time Warner executive told me last week, there’s at least $20 per Time Warner share lying somewhere on the table somewhere. After June 21, they are obligated to go out there and try to get it.