When the AT&T/Time Warner deal was announced on October 22, Donald Trump, in the heat of the campaign, said the deal would be rejected by his Administration as concentrating too much media power in one entity. He also said he would seek to break up Comcast-NBC Universal, reinforcing his populist attack on mainstream media.
Initially, given these high profile campaign attacks on the transaction, sentiment regardling likely regulatory approval could become much more cautious. We recommend filtering out the noise to focus on the process by which such transactions are investigated and vetted.
Disregard the Rhetoric: We continue to believe the proposed transaction will ultimately be approved (and we doubt DOJ will file a lawsuit to break up Comcast-NBC Universal). The campaign is over and we doubt the merger was a significant factor affecting the outcome of yesterday's election, suggesting it will not be a policy priority. Moreover, much of the President-elect's attack on the deal was probably driven by his broader criticism of bias in the mainstream news media (i.e., CNN).
At the end of the day, the Justice Department will conduct a civil prosecutorial investigation and we doubt the Trump Justice Department will pursue a highly uncertain and ambitious case to block this vertical merger. Challenges must be filed in federal court with the burden of proof on the government. In other words, blocking the deal is not an executive decision within the unilateral power of the President, and we doubt DOJ would want to pursue a weak case in court. The Antitrust Division does not like to lose.
Also, we would expect cooler heads to counsel the President-elect that DOJ's review of the merger is a civil prosecutorial investigation and that impulsive statements of opposition are simply inappropriate in this context. Generally, the White House stays out of such matters and, most likely, the Administration will do nothing that attempts to influence or affect the conduct of this investigation.
FCC Review: As for the FCC, it will likely become a 2-2 Commission split between Republicans and Democrats with Commissioner Ajit Pai designated as Chairman. It is not clear whether President Trump will nominate him for Senate confirmation in that position. Another Republican will be nominated to fill the upcoming vacancy on the five-member agency. The White House gets a 3-2 majority on the FCC. Power will now shift away from an aggressively regulatory Tom Wheeler Commission although we expect the current Chairman to push as many of his top agenda items as possible before stepping down. The set-top box proceeding could be one of these items.
It is still unclear whether the AT&T-Time Warner transaction will be presented to the FCC for review. We anticipate the necessary Hart-Scott-Rodino filing at the Justice Department, perhaps as early as this week or next. That will trigger a 30-day waiting period subject to extension through a second DOJ request for additional information (and a second request extending the duration of review is likely). Typically, the FCC application for license transfers is filed at the same time the Justice Department/FTC paperwork is filed. If nothing is filed at the FCC, that would be a strong indication that the companies, as we have speculated, will attempt to bypass regulatory review at the FCC.
If FCC review is successfully avoided, the odds of approval go way up. We would be in the 70 percent range on likely approval because DOJ review, by itself, is not likely to present a strong enough case to advocate an injunction in federal court. Again, the burden of proof in such cases is on the Justice Department.
Even if the FCC gains jurisdiction to review the deal, we doubt regulators would take action that derails the merger. Generally, Republicans have opposed duplicate substantive merger review at the FCC, supporting DOJ review as the single venue for determining the competitive impacts of a proposed deal. Even when deals are approved with conditions, Republicans typically oppose extraneous policy conditions that do not directly relate to the specifics of a proposed transaction.
The FCC would gain jurisdiction if FCC-regulated licenses are being transferred to AT&T (sections 214 and 310 of the Communications Act), determining whether transfers are consistent with the public interest (an amorphous, somewhat unpredictable standard). As noted previously, Time Warner has a broadcast license in Atlanta and dozens of earth station licenses that link remote feeds to satellites for CNN and HBO operations.
We believe there are likely alternatives that would allow the transaction to proceed without transfering these licenses. The Atlanta station is an issue, but we suspect it will be excised from the deal. Clarity on this process could be complicated by the quiet period now in effect while the incentive auction of broadcast spectrum is underway. We cannot confirm that, but it is a distinct possibility.
We would not be surprised if the current FCC is interested in finding other legal means to engage in the review process, assuming no license transfer applications are filed. There is a specific Clayton Act provision that authorizes FCC review of common carrier deals but this authority duplicates DOJ review with the same substantive and procedural limits faced by DOJ. Also, the deal is not a common carrier acquisition, indicating the statute may not apply in any event. As far as we know, the FCC has never relied on its Clayton Act authority to review deals.
The FCC might consider bootstrapping review authority of the broader deal if smaller transactions are proposed to divest the licenses that would otherwise trigger FCC authority. This would probably be an untenable stretch, but creative lawyering is the hallmark of activist regulators.
The FCC would have an advisory role as part of the DOJ review, but without the power to take formal action against the deal, the impact of such review is quite limited.
At this point, we still await clarity on AT&T's approach. Although the political outlook regarding this deal remains a bit murky, we believe the regulatory climate will probably enter a warming trend, suggesting a more positive outlook for ultimate approval.
