AT&T-Time Warner Deal: Some Turbulence But Should Land Safely

Takeaway: Deal opponents are looking for leverage but we continue to think FCC review is avoided and DOJ ultimately gives the OK.

AT&T-Time Warner Deal: Some Turbulence But Should Land Safely - time warner


We continue to believe the AT&T/Time Warner deal is on track for ultimate approval but opponents and critics of the transaction are escalating their attacks in an effort to gain leverage for conditions and other mandates that could be imposed on the combined entity.


Earlier this week, the sole Democrat on the FCC, Commissioner Mignon Clyburn, suggested the FCC could assert review power over the transaction under the Clayton Act, the primary antitrust enforcement statute governing mergers.  In addition, several Democratic senators on Capitol Hill demanded and received AT&T's public interest/consumer benefit justification for the merger.  


Deal critics wanted some kind of substitute for the typical public interest filing that would have been made had the companies submitted the deal to the FCC for approval. Thus far, AT&T has determined that it will not seek the transfer of any FCC-regulated licenses from Time Warner, obviating the need for FCC review and approval.


Regulatory bottom line:  We don't believe Clayton Act review is available to the FCC and it would not make a difference in any event to the final regulatory outcome.  Capitol Hill input can, at times, offer insight regarding regulatory momentum for or against a particular transaction, but we do not expect criticism and opposition from Democratic lawmakers will make a material difference in this case.


The key takeaway -- greater operational and cost uncertainty for edge players:   Edge content providers (DISH, NFLX, AMZN, GOOGL) are nervous that the shift to Republican control at The White House and the FCC, along with continuing GOP majorities in both houses of Congress, will mean the inevitable retreat from strict net neutrality enforcement and -- eventually -- the formal abandonment of the current rules.


The recent FCC decision to terminate the prior FCC's investigation into zero-rating (exempting certain content from monthly data allowances) underscores that the regulatory trend is to allow broadband providers greater operational flexibility to explore new revenue and business models, including monetizing relationships with upstream content providers.


This is good news for ISPs but it creates operational and cost uncertainty for unaffiliated bandwidth-intensive services on the network edge.  While it's possible that Congress will work out a bipartisan consensus to protect net neutrality concepts without reliance on Title II common carrier regulation (to ensure content is not blocked, throttled or otherwise subject to unreasonable discrimination), the legislative process is a big unknown.


Moreover, recent indications suggest Republicans are less interested in outright bans on paid prioritization, the big policy concern that drove the Obama FCC to adopt rigorous net neurality restrictions enforced under common carrier rules and doctrines.


The upcoming legislative battle over the next chapter in net neutrality could get nasty.  Stay tuned for that drama.


With uncertain prospects on Capitol Hill and a likely FCC reversal of Obama era net neutrality policies, the merger review process offers the best opportunity for edge providers to lock in some level of net neutrality protection.  Without the FCC asserting its typical "public interest" review power, the mechanism for winning regulatory concessions is sketchy at best.


It is up to the Justice Department to build a plausible case against the merger and pressure AT&T to accept some conditions to get the deal done within a reasonable time frame.


Against this backdrop, edge players must push sympathetic lawmakers and all other possible allies to raise the temperature level, hoping the FCC could be pressured to intervene (somehow) or DOJ will feel compelled to demand meaningful conduct remedies in a consent decree.


Clayton Act Authority:  Generally, Commissioner Clyburn is correct when she says the FCC has merger review authority under the Clayton Act, the primary merger review statute.  But the FCC never relies on the Clayton Act when it reviews deals because the FCC's authority is far more constrained than FCC reviews under the Commission's license transfer power. 


Under the Clayton Act, the FCC would have the burden of demonstrating to a federal court that the deal should be rejected under the same antitrust standard applicable to the DOJ's review.  Does the merger substantially lessen competition in any relevant market?


We do not expect the FCC to assert Clayton Act review power, ensuring the deal avoids FCC scrutiny.  As a substantive matter, duplicating DOJ review -- with the same statutory standards and evidentiary burdens of the DOJ -- makes little practical sense.  It also exposes the FCC to more criticism that it performs redundant functions and should have its authority curtailed, a notion advanced by members of the Trump Transition team.


And technically, it is doubtful the Clayton Act applies in this particular case.  The statute says the FCC can assert review power under the Clayton Act for acquisitions of common carriers.  Time Warner, the content company AT&T is acquiring, is not a common carrier.  We think AT&T would have a good case to seek a judicial declaration that the FCC has no power under the Clayton act for this transaction.


We suspect the prior FCC under Democratic Chairman Tom Wheeler was exploring theories for asserting review power over the T/TWX transaction given AT&T's decision to avoid license transfers that would normally trigger FCC merger review.  Perhaps a novel reading of the Clayton Act represented the favored approach.  But the current Republican Chairman's DNA is not amenable to creative readings of statutory authority to assert power over this deal in a way never before attempted by any FCC. 


DOJ Review:  In its response to Democratic senators, including the usual suspects like Senators Elizabeth Warren, Al Franken and Ed Markey, AT&T asserted that various foreclosure concerns made little economic sense for the company after the deal is done.  Withholding TWX content from other distributors, for example, would devalue the subscription/advertising revenues built into the purchase price of these content assets.  Essentially, the company repeated the various arguments that the CEOs of AT&T and Time Warner made in a Senate Commerce hearing back in December.


The Justice Department's review will move ahead, including conducting confidential interviews and gathering data from industry participants that have concerns with the deal.  AT&T has signaled a willingness to accept reasonable conditions and its written assertions that it has no interest in violating basic net neutrality protections or withholding TWX content could open the door for conditions that would be embodied in a Justice Department consent decree.  But the underlying antitrust case to block this deal is not strong and we suspect a government overreach would force litigation with doubtful upside for DOJ.


AT&T is acquiring a leading, established set of content assets in the Time Warner deal, but the expanding availability of polished, high quality scripted content (including from emerging original content players like Netflix and Amazon) may dilute the long term impact of the purchase.


The next generation of viewers spends more time engaged with social media on smartphones than sitting in front of the TV.  These market trends are relevant to the assessment of vertical foreclosure risk, suggesting both a diminshed competitive threat from this deal and uncertainty about the sustainable value of the assets being acquired.

Capital Brief: 4 Things to Watch Right Now In Washington

Capital Brief: 4 Things to Watch Right Now In Washington - dt


President Trump told two dozen or so CEOs of major U.S. companies today he plans to bring millions of jobs back to the U.S. He also touched on plans to deport illegal immigrants to Mexico. Speaking of CEOs, former Exxon Mobil CEO and current Secretary of State Rex Tillerson is currently in Mexico on what Trump described as a "tough trip."


Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.


#Obamacare #Taxes #GOP


Republicans in the House are divided on two tax issues as part of replacing the ACA. The members of the conservative Republican Study Committee and Freedom Caucus don’t want a tax credit to assist people with the cost of insurance. They believe 1) it’s too costly and 2) leaves potential for abuse.


The other tax proposal would set a limit on the non-tax treatment of employer-sponsored health insurance as a way to pay for the tax credit. This worries many Republicans as it resembles the highly unpopular Obamacare Cadillac tax and was part of the plan that Republicans railed against eight years ago.


Capital Brief: 4 Things to Watch Right Now In Washington - z va




The federal budget process started a cleanse yesterday. President Trump assembled his budget advisors and called finances in the U.S. a “mess” vowing to improve them and “do more with less.” The budget team consisting of Treasury Secretary Steve Mnuchin, OMB Director Mick Mulvaney, as well as top aides Jared Kushner, Stephen Miller, Steve Bannon, and Reince Priebus have their work cut out for them as the president ambitiously plans to release his proposal by mid-March.


Capital Brief: 4 Things to Watch Right Now In Washington - z bill



#China #US #Tillerson


Following a rocky start, the United States and China are cozying back up to each other thanks in part to Secretary of State Rex Tillerson. Both countries have affirmed the importance of a bilateral relationship. And both sides agreed on the need to address the North Korean threat. The progress made between Tillerson and China is a long jump away from early talk of backing away from the "One China Policy."  


Capital Brief: 4 Things to Watch Right Now In Washington - z r til

what's taking so long?

#GOP #TrumpAgenda


The pace at which Republicans on the Hill are working to enact an agenda has caused a lot of angst amongst Trump supporters. While progress on some of the major Republican policies like health care and tax reform has not moved as fast on the Hill as some supporters would like, President Trump is signing bills at the same pace as Presidents Barack Obama, Ronald Reagan and Jimmy Carter.


Capital Brief: 4 Things to Watch Right Now In Washington - z tr


Our Senior Telecom & Media Policy Analyst Paul Glenchur writes that deal opponents are looking for leverage, but we continue to think FCC review is avoided and DOJ ultimately gives the OK. You can read the full analysis here.


Join us on Monday, 27 Feb at 11AM EST to hear the four star former commander of U.S. and UN forces in Korea explain the chance of war there. You can find the dial in details here.


Join us for a call on March 1 with David Hoppe, Speaker Ryan's former Chief of Staff, the morning after President Trump's Address to a Joint Session of Congress. You can find the dial in details here.



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Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending

Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending - trump inaug

Source: Wikipedia


At yesterday's press conference, President Trump persisted in calling mainstream media reports #FakeNews. As we pointed out, these attacks are working because media trust has been in decline for 20 years.


Here's a quick look at the key issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.


#NATO #Mattis #Trump


Defense secretary James Mattis warned other NATO countries to meet their defense spending requirements or the U.S. may not be as active as before. Mattis is staying in line with one of candidate Trump’s campaign themes that other NATO countries need to pull their own weight. Currently only five countries meet the NATO military requirements.


Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending - nato

Source: Axios


#Trump #Infrastructure


Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending - bridge

Source: Pexels


President Trump’s infrastructure plan got a boost yesterday from a report by the American Road and Transportation Builders Association. The report found that 55,710 bridges are deficient in the U.S. adding fuel to Trump’s planned ~$1 trillion infrastructure spend. With infrastructure currently taking a backseat to health care and tax reform, this could elevate the issue on the Hill, but we don’t foresee action until tax reform begins to gel.


#AllTimeHighs #Confidence


Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending - E Pluribus tweet em


Early yesterday morning President Trump tweeted: “Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism - even before tax plan rollout!” Hyperbole? Trump isn’t known for his modesty.


So will the post-Election Day stock market tear continue? Will the U.S. economy actually grow? We say yes on both. The year-over-year growth rate in retail sales hit 5.6% on Wednesday, a level not seen since March 2012 as Hedgeye CEO Keith McCullough wrote in a note.


He also points out that the core reading on Consumer Price Inflation (CPI) hit the highest level in 5 years, accelerating to +2.5% year-over-year. The U.S. economy and inflation are heating up. Based on this economic data the bull market in stocks has room to run.


CFPB Director Richard Cordray will live to fight another day. Cordray has been on a very hot seat since Trump won the presidency, but the U.S. Court of Appeals for the DC circuit put aside a ruling that the bureau’s structure is unconstitutional.


Litigation is expected to last far into 2017 with oral arguments scheduled by the Court on May 24. Cordray can breathe a sigh of relief - for now - but the calls for his head won’t go away with House Financial Services Chair Jeb Hensarling making it his singular goal to get rid of Cordray. Hensarling has changed his mind on replacing the head of the CFPB with a bipartisan panel - perhaps so Cordray’s replacement could overturn some of his more extreme decisions.


SCOTUS Nominee Neil Gorsuch has spent the last few weeks going from Senate office to Senate office speaking with Senators on the merits of his nomination. Senate Judiciary Committee Chairman Chuck Grassley has now set the date for Gorsuch’s hearing on March 20th in line with the confirmations of SCOTUS Justices Sonia Sotomayor and Elena Kagan.


Now the question is can Gorsuch and Team Trump get eight Democrats necessary for confirmation in that span of time...


Capital Brief: Trump Team Talks Stocks, NATO & Infrastructure Spending - politico info


Janet Yellen appeared earlier this week before both the Senate Banking and House Financial Services Committees. As expected, the House hearing provided more fireworks, mainly over questions regarding the appropriate level of financial regulation and monetary policy. At both hearings, Chair Yellen gave little indication of when and if interest rates will be raised in the coming months.


Our Senior Energy Analyst Joe McMonigle writes that the White House tells EPA to get ready to quickly implement pending Executive Orders. You can read the full analysis here.



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Capital Brief: Inside The Trump Administration's Growing Pains

Capital Brief: Inside The Trump Administration's Growing Pains  - Washington D Usa White House C America 1641327

Source: Max Pixel


As President Donald Trump blasts the mainstream media for peddling fake news, here's a quick look at the key issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.


#Russia #FlynnResignation


Capital Brief: Inside The Trump Administration's Growing Pains  - roy blunt wiki
Source: Flickr 


Democrats have called for investigations into the ties between Russia and the Trump Administration, and now following Flynn’s resignation Republicans are starting to hop on board. Republican Senator and Senate Select Committee on Intelligence member Roy Blunt has joined them in their calls for an investigation and Majority Leader McConnell has now said it is highly likely the committee will probe Flynn’s Russia ties.


Blunt believes that every president can reexamine their relationship with any country, but wants to find out if their is a larger problem in the Administration's relationship with Russia.



#GOP #Trump


Capital Brief: Inside The Trump Administration's Growing Pains  - trump 2 15



Although the Trump Presidency has experienced some growing pains early on, one thing he has been able to count on is support from Republicans in the House and most of the Republicans in the Senate. On the other hand, what Trump has not been able to rely on so far is crossing the aisle to get votes from Democrats - particularly in the House.  


Again, it’s still early, but if trends and the hyper-partisanship continue, Trump and his Republican allies will likely go it alone in the House and focus their energies on winning over a handful of Dems in the Senate.


#FreedomCaucus #Obamacare


Capital Brief: Inside The Trump Administration's Growing Pains  - dont tread

Source: Flickr 


Even though Republicans have control of the House, Senate, and White House, the Freedom Caucus is still not satisfied with the way things are, well, progressing. The conservative caucus voted to oppose an ACA repeal bill if it does not go as far as the repeal measure that President Obama vetoed in 2015.  


This bill killed the core elements of the law including subsidies, taxes, mandates, and Medicaid expansion. The Freedom Caucus isn’t just focused on repeal though, they will support adding elements of replacement to a quick repeal as long as it meets their stringent demands.


Three years ago former House Ways and Means Chairman Dave Camp proposed a tax on banks and other financial institutions as part of a tax reform proposal. The tax received major push back from the industry, but tax reform didn’t move forward with Obama in office.


Now the Republicans are in control of Washington, banks are looking to make sure the tax doesn’t re-enter the picture. As we get closer to the start of the tax reform process, expect banks to push much harder to avoid any sort of bank tax that would allow Republicans to pay for lowering tax rates.


The Pentagon will forward its supplemental request for the FY 2017 budget to OMB on March 1 and an expanded FY 2018 budget on May 1.  Both items are splitting Republican members on the Hill. The The FY 2017 supplemental request will be for at least the $15B approved by the House last fall and could be for as much as $40B as discussed by Senator John McCain and others.


While the urgent need to improve near term readiness is universally accepted, how to pay for it is not. An increase in Pentagon spending in 2017 could be done passing a baseline budget that conforms to the Budget Control Act and then plussing up the OCO by the $15-$40B being discussed. Not improbable.


Any expansion to the FY 2018 budget, however, will require changes to the Budget Control Act and a budget resolution that lays out a broader and longer term discussion of government finances. That can wait until this summer/fall but will expose the rifts among Republican fiscal conservatives, Republican hawks and Democrats.


Our Senior Defense Policy Analyst Emo Gardner spoke about the Flynn resignation, its impact and what’s next. You can listen to the replay here.


Our Senior Telecom & Media Policy Analyst Paul Glenchur writes the AT&T is likely to win the public safety network contract. Rules discouraging state opt-outs should boost network and contract value. You can read the full analysis here.



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Capital Brief: 6 Things to Watch During Another Tough Week for Trump

Capital Brief: 6 Things to Watch During Another Tough Week for Trump - trump texture image


Choose your adjective. It's shaping up to be another tough/busy/interesting week for President Donald Trump. Last night, national security advisor Michael Flynn resigned (more on that below), while judges on both coasts have now issued rulings against Trump's executive order closing U.S. borders to travelers from seven mostly Muslim countries.


Here's a quick, distilled look at the related issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.


#Trump #Pence #Flynn


Capital Brief: 6 Things to Watch During Another Tough Week for Trump - michael flynn


National security advisor Michael Flynn resigned amid the latest news that he misled Veep Mike Pence and the Department of Justice informed the White House that he could be subject to blackmail by the Russians. Following days of speculation whether President Trump would fire him, the controversial Flynn was forced to take matters into his own hands.


Trump now has the ability to tap a seasoned advisor who can lend stability to a National Security Counci staff in disarray -- though the pool is limited given that last April, fifty Republican senior national security officials signed a letter stating that a Trump presidency would put our nation at risk.


Our seasoned colleague General Emo Gardner has more insight here. He's hosting a "flash call" today and lists Retired General Keith Kellogg, Former CIA director and General David Petraeus, and Retired Vice Admiral Robert Harward as potential replacements.


#Obamacare #GOP


Capital Brief: 6 Things to Watch During Another Tough Week for Trump - obamacare trump


The regulatory reform train will keep moving forward with no plans of slowing down. The House is lining up a slew of regulations they want to overturn through the Congressional Review Act: from one that determines states’ abilities to conduct drug testing programs for people applying for unemployment insurance to another that establishes how states can set up payroll deduction savings programs for private sector workers.


While many Republicans have complained about the pace of ACA and tax reform, regulatory reform is going full steam ahead.


#Trudeau #NAFTA #Canada


Capital Brief: 6 Things to Watch During Another Tough Week for Trump - trudeau canada


President Trump and Justin Trudeau met for the first time as the Canadian Prime Minister tried to find some common ground all the while trying to avoid contentious discussions on immigration and instead focussed on economic issues.


The president’s calls to renegotiate NAFTA will have a major effect on our neighbors to the north as 75% of Canadian exports come to the United States, but the trade deficit is considerably lower at $15B than with our neighbors to the south - $58B.  First daughter Ivanka Trump smoothed any tensions with Trudeau as they were able to connect over their shared desire to promote women in the workplace.


After what has seemed like a long confirmation process, the pace is picking up speed. Treasury Secretary Steve Mnuchin and Veterans Affairs Secretary David Shulkin were confirmed last night and Small Business Administration-designate Linda McMahon will receive a full floor vote this week.


There’s even a chance Trump could get Energy-designate Rick Perry and Interior-designate Ryan Zinke confirmed later this week.


Only 10 more Cabinet and 1,000 more sub-Cabinet positions- and a SCOTUS Justice left to go.


Movement of President Donald Trump’s nominees and major policies on Capitol Hill has been slow - which is the norm as Hill watchers will rush to tell you. But influential Ohio Senator Rob Portman has given Trump and other Republicans reason to be hopeful as he expects to see tax reform as early as this summer and since his plan is revenue neutral and is more likely to become permanent at the end of the tenth year of reconciliation.


Trump may be a little behind in his confirmations, but if Democrats keep dragging their feet and chew up valuable floor time, there won’t be quite as much time for the Republican agenda - or the Portman plan for that matter - to move forward on their terms.


Last week we hosted a call with Dorothy Coleman, Vice President, Tax and Domestic Economic Policy at the National Association of Manufacturers, to discuss tax policy on the manufacturing sector. You can find the replay here.



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Here's Why Oil Prices Rose Despite Increase In Inventories

Here's Why Oil Prices Rose Despite Increase In Inventories - mcmonigle 2 8 17


The U.S. Energy Information Administration on Wednesday reported crude-oil inventories climbed by 13.8 million for the week ended Feb. 3. Oil prices rose on the day, a move confounding many who thought the increase would send prices lower.


No need to be confused.


"The market as a whole is focused on the OPEC deal," says Hedgeye Senior Energy Policy analyst Joe McMonigle. Secondary OPEC sources say the deal to cut the 14-member country's oil production, from 33.8 million barrels a day to 32.5 million barrels a day, has been 90% compliant.


"I'm still a skeptic on that point," McMonigle says.


The more important thing to watch, he says, is how higher oil prices (up 11% in the past three months) are affecting U.S. shale production, McMonigle says.


Active U.S. rig counts rose from 729 versus 571 a year ago. "The U.S. shale producers are really responding to the higher oil prices as a result of the OPEC deal," McMonigle says.


Click here to watch McMonigle's entire interview on BNN.