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Trump's Merger Cops Sow More Deal Uncertainty With AT&T Appeal

David McLaughlin, Scott Moritz
Pedestrians pass in front of the Time Warner Center in New York, U.S., on Wednesday, June 13, 2018. AT&T Inc.'s sweeping court victory allowing its takeover of Time Warner Inc. delivers a sharp setback to the Justice Department's new approach to policing mergers under President Donald Trump and promises to spark a merger wave across industries.

For a moment, it was the biggest antitrust suit in 20 years, a high-stakes attempt to block an $85 billion mega-deal that would create a media and telecommunications giant. Then, like that, the government was handed a loss and the case was over.

Now the merger that President Donald Trump has so publicly opposed -- the marriage of AT&T Inc. and Time Warner Inc., the home of CNN -- is once again in the sights of Trump’s Justice Department.

The turnabout underscores fundamental questions about antitrust enforcement in the Trump era that have lingered ever since the AT&T case last year, including the big one: Could this pro-business administration, which has given corporate America lower taxes and looser regulation, tighten the screws on certain mergers?

From the start, Trump himself loomed over the AT&T-Time Warner deal. His tweet storms about CNN seemed to politicize the deal, even though the antitrust division is supposed to be independent of the White House. Trump has used the power of the presidency to muscle corporations before.

His relentless criticism of the network has hung over the AT&T case from the start, sparking speculation that the president’s personal views, rather than legitimate antitrust enforcement, was fueling the case all along. Fairly or not, that viewed reared its head again last month when the Justice Department approved Walt Disney Co.’s acquisition of 21st Century Fox Inc.’s entertainment assets -- a victory for Fox Chairman Rupert Murdoch, who was fending off a rival bid by Comcast Corp.

‘Wall Street’

“Right now, Wall Street doesn’t know how to handicap what’s coming out of D.C.,” said Amy Yong, an analyst with Macquarie Capital USA Inc. “There are so many potential media deals in motion that I’d expect the whole sector might be frozen for a bit while this gets resolved.”

Well, not the whole sector. Disney and Comcast are still battling over the Fox assets and trading barbs over the degree of antitrust risk in a Comcast acquisition. Fox, which prefers the Disney offer, has argued a sale to Comcast faces high hurdles. The AT&T appeal itself gives Fox ammunition, Craig Moffett, an analyst with MoffettNathanson LLC, told Bloomberg Radio.

“That seems to be what they wanted anyway,” he said about Fox. “This just gives them air cover for making the decision they’ve wanted to make.”

Why AT&T-Time Warner Win Opens the Dealmaking Gates: QuickTake

Makan Delrahim, who was picked by Trump last year to run the Justice Department’s antitrust division, is adamant that his decisions have been based on sound law enforcement, not politics. Delrahim denied that the Time Warner deal faced a different standard than Fox’s. Disney was willing to sell assets to resolve harm to competition from the tie-up, whereas AT&T wouldn’t go far enough, he wrote in a column published Thursday in the Washington Times.

Not Abnormal

“No objective observer can describe the antitrust division’s investigation and suit 13 months after announcement of the AT&T-Time Warner deal -- the largest telecommunications merger in history -- as outside the norm,” Delrahim said.

But in many ways, it was. That’s because it broke with past practice for policing mergers of companies that operate in different parts of a supply chain and don’t compete directly. When enforcers found competitive harm from such vertical deals, they typically imposed conditions on how the companies conduct business. Delrahim broke with that tradition with the AT&T case by demanding that AT&T sell assets like Time Warner’s Turner Broadcasting.

The lawsuit, filed two months into Delrahim’s tenure at the antitrust division, stunned many on Wall Street and in Washington. An administration that was seen as ready to usher in a wave of corporate dealmaking was suddenly throwing up unexpected roadblocks. Adding to the confusion was that a nearly identical deal -- Comcast’s acquisition of NBCUniversal -- was approved by the Obama administration.

Price Power?

In the Justice Department’s view, getting control of Time Warner networks such as CNN and TBS gives AT&T bargaining leverage over pay-TV rivals like Dish Network Corp. that license Turner programming. AT&T would be able to raise prices on competitors, leading to higher consumer prices. The only way to prevent that, the government argued, is to block the deal or force AT&T to sell Turner or its DirecTV business.

U.S. District Judge Richard Leon in Washington didn’t buy it. In a 172-page decision issued June 12, the judge rejected every part of the government’s case.

While the U.S. suffered a stinging defeat, the theory behind the case was hardly radical, said George Hay , a professor and economist at Cornell Law School and a former Justice Department official.

“They’re frustrated that he didn’t get it,” Hay said. “The appeal has to be at the end of the day that he never got the message about why this merger could be anti-competitive. I don’t think they’re going to win, but they have a coherent basis for appeal.”

Tough Case

Legal experts say they have difficulty seeing Delrahim prevailing. The government will need to show Leon’s decision was clearly unreasonable, such as a “clear error of judgment” by the judge in reaching his conclusions, Bloomberg Intelligence legal analyst Jennifer Rie said in a note.

Still, investors aren’t convinced there isn’t risk for AT&T. Shares fell 1.7 percent Friday, a day after the Justice Department filed its notice of appeal. If AT&T losses, the appeals court could force the company to sell Turner Broadcasting.

It’s not unheard of for antitrust enforcers to appeal a merger loss and win. The Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department, lost its bid in 2007 to stop Whole Foods Market Inc. from acquiring rival Wild Oats Markets Inc. After the companies closed the deal, the federal appeals court in Washington reversed the decision and sent the case back to the lower court. Whole Foods later settled, agreeing to divest 32 Wild Oats stores.

If there’s a weakness in AT&T’s argument, it’s in the “trust us” defense, Moffett said in a note on Thursday. The case, he said, hinged on whether AT&T would act in its own interest and capitalize on its control of popular programming or instead honor a promise to play fair.

“Pull on that one thread,” Moffett said, “and the whole sweater, er, decision, unravels.”

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