Below is an excerpt from an institutional research note written by Telecom & Media analyst Paul Glenchur that explains why we're removing Time Warner (TWX) from Investing Ideas today:
We continue to believe the Justice Department is fighting an uphill battle to block the proposed AT&T/Time Warner merger. The case goes to trial next week before Federal District Court Judge Richard Leon who now says the volume of testimony and evidence to be presented could mean a trial lasting as long as eight weeks, well beyond his original three-week estimate. This suggests Judge Leon's decision could push into June. The current merger agreement expires June 21 absent another extension.
The Justice Department hopes to demonstrate that AT&T's vertical acquisition of Time Warner -- particularly Turner Networks (TBS, TNT, CNN) -- would strengthen the combined company's bargaining position, conferring the market power to demand higher wholesale rates for Turner content. In turn, these higher costs will be passed on to consumers as higher video subscription rates, not only injuring consumers but impairing competitive alternatives from legacy and over-the-top video service providers.
Overall, we think AT&T is in a good position to handle the challenge based on facts to be presented at trial, but we suggest some caution here.
First, the length of time to resolve this matter could become a concern for AT&T. The current merger agreement expires June 21 after having been extended twice due to the Justice Department's investigation and legal challenge. Initially, DOJ wanted to delay the trial until May but AT&T was able to convince the Judge to expedite the case for a March trial. Despite this, the trial itself could run well into May and a decision could push right against the June 21 expiration date.
We assume the agreement will be extended again if necessary, but Judge Leon's decision, even if favorable to AT&T, could be appealed. We assume a reasonable likelihood that the DOJ would seek a stay of Judge Leon's order pending a full appeal, arguing that allowing the deal to close would cause irreparable harm as "unscrambling the egg" is impractical post-integration. AT&T would likely contend it has an overwhelming chance of winning on the merits of any appeal and thus a stay is unjustified. That would seem to be correct, but that result is not guaranteed.
Thus, the trial and subsequent proceedings could require significant extensions of the merger agreement. At this point, we assume Time Warner will go along, but there is always the concern that shareholder fatigue could set in as the antitrust fight stretches toward a two-year anniversary. If other suitors for Time Warner assets take an interest, we wonder if the DOJ could ultimately prevail by simply running out the clock. We do not consider this a likely scenario, but we would not be surprised if this possibility figures in DOJ's strategic thinking.