On Monday, Fox News ran yet another Charlie Gasparino segment in which the Fox reporter said President-elect Trump has asked advisors for reasons to oppose the AT&T-Time Warner merger. Even if such reports are way off the mark (and they might be), they can rattle investors and increase headline risk for the merging entities. Candidate Trump stated his opposition to the deal within hours of its announcement during the campaign.
The deal is now under Justice Department review. Regulatory risk to the deal actually declined when AT&T indicated this week that it would not need to seek separate FCC approval because it does not plan to transfer FCC licenses from Time Warner to AT&T. We figured FCC avoidance was likely (Hedgeye Potomac, AT&T-Time Warner Should Get Regulatory OK, Oct. 23, 2016).
We continue to believe the merger will win the regulatory okay in Washington later this year.
Ironically, the Fox News reports (and some from other media outlets) probably bolster the likelihood (without guaranteeing) that the Justice Department will not seek to block the transaction. The Antitrust Division, as fully expected, issued a second request for data on December 8 and tangible agency action toward the merger will await substantial compliance with the data request (which is confidential). Thus, the likely Justice Department decision regarding this deal will be made by the incoming DOJ team.
The Reports
The Fox News report suggested Donald Trump has not reached his own conclusion regarding the need to block the transaction. But it pointed out that opposition, to the extent it exists, could be a political vendetta against CNN (owned by TWX) for what was perceived as unfair or biased reporting on Trump during the campaign.
In addition, the report suggested a senior Trump Transition advisor, a former Breitbart News executive (Steve Bannon), may oppose the deal due to concerns about AT&T's distribution of Breitbart content. In addition, the report suggested the head of Newsmax, a confidant of Donald Trump, may oppose the deal for similar reasons (the Newsmax channel has had a carriage dispute with DirecTV, part of AT&T).
These kinds of stories can only compromise a potential federal case in federal court to oppose the merger. Initially, there are obvious first amendment concerns if the government challenges the merger under the antitrust laws in retaliation for CNN's campaign coverage (even if it was biased).
Second, a federal judge would have to probe whether political advisors to the new President influenced the government's litigation position for reasons unrelated to the enforcement of the antitrust laws. The news reports beg the obvious questions and AT&T, assuming litigation took place, would have every reason to bring these reports to the court's attention. Such reports could lead to uncomfortable litigation discovery requests.
And we suspect a federal judge would be uncomfortable with the possibility that a civil case might have been brought, even in part, for political or conflicted puposes (Hedgeye Potomac, Another Trump Dump on AT&T-Time Warner, Jan. 6, 2017).
DOJ's Mission
We note that Sen. Jeff Sessions testified today before the Senate Judiciary Committee as it considers his nomination to become the next Attorney General. His opening statement and his responses to questions from the panel underscore his stated (and appropriate) view that the Attorney General enforces the law and pursues cases with objectivity even if the DOJ approach breaks from the President's political agenda.
Neither the AT&T-Time Warner deal nor antitrust enforcement policy was specifically addressed at today's hearing, but to the extent political overtones color an antitrust enforcement decision, an action against the proposed merger is inherently compromised. We suspect antitrust division lawyers would have an even greater reluctance to pursue a case against such background.
Since the early 1970s, when President Nixon interfered with an antitrust enforcement case to win financial support for the GOP convention, antitrust officials have been careful to avoid appearances of political impropriety when pursuing investigations and prosecutions (Hedgeye Potomac, Washington Warms Up to AT&T-Time Warner, Dec. 2, 2016).
This does not mean antitrust enforcement is irrelevant as a policy matter. Indeed, the Obama Administration has viewed anti-competitive industry consolidation as a contributor to national income inquality. But investigations and cases must be credible and based on facts. The courts will demand it.
In any event, as we've previously discussed, we believe a case against this vertical transaction on the merits would be difficult to win. To the extent issues arise, they can be addressed through settlement conditions embodied in a consent decree. The absence of a parallel FCC review also makes government action against the merger difficult to execute.
When the two agencies take a tag-team approach to a media or telecom deal, the government's strategic flexibility is enhanced and concessions are easier to win. An aggressive standalone DOJ case against the merger in federal district court would be an uphill battle and likely a questionable use of agency resources.
EDITOR'S NOTE
This institutional research note was written by Hedgeye Potomac Telecom & Media Policy analyst Paul Glenchur earlier this week. To read more institutional research ping sales@hedgeye.com.
