DOJ Appeal of AT&T/TW Seen Facing Long Odds; Comcast Bid for 21st Century Fox Tops Disney

Whether DOJ will appeal a U.S. District Court rejection of its attempt to block AT&T's $108.7 billion buy of Time Warner isn't clear, with antitrust and law experts split. "DOJ would be crazy to appeal Judge [Richard] Leon's decision," emailed Nebraska College of Law assistant professor Gus Hurwitz. But, Larry Downes, Georgetown University Center for Business and Public Policy project director, said Justice is more likely than not to pursue an appeal, even one it thinks it can't win, because that gives Justice leverage it trying to force the companies to agree to conditions that would mitigate anti-competitive worries.

Experts were split on whether Tuesday's decision (see 1806120060) would be a foot on the gas for more media merger and acquisition activity, particularly vertical deals. The department didn't comment Wednesday.

Citing the verdict and Fox's July 10 shareholder meeting, Comcast launched a possible bidding war Wednesday with Disney for Fox's non-broadcast assets. Comcast said its $35 per share cash offer -- for a total of $65 billion after Fox's broadcast assets are spun off -- is 19 percent better than Disney's offer. Comcast said it's "highly confident" a Fox deal would get regulatory approvals "in a timely manner" and it's as likely if not more so than Disney/Fox. Fox's board turned down an unsolicited bid from Comcast, citing regulatory concerns (see 1804190003).

Comcast said it's offering Fox the same regulatory commitments as Disney, including the same $2.5 billion reverse termination fee and same divestiture any of Fox's regional sports networks if required. It said it would reimburse the $1.525 billion break-up fee Fox would owe Disney "in the unlikely scenario" Comcast/Fox doesn't go through because of regulatory disapprovals. It said it made its Antitrust Act filing Wednesday to begin a DOJ regulatory review, and it already submitted substantial material to the agency in connection with its Disney/Fox review so there shouldn't be a notable difference in timing of an antitrust review. Comcast said international approval is as likely as for Disney/Fox, if not more, because of Comcast's relatively small international presence. Some have seen control of movie studios and regional sports networks as potential stumbling blocks in a Comcast/Fox deal (see 1805230019).

Leon's opinion "is not a radical one and it will be difficult to overturn on appeal," emailed antitrust expert and Cornell Law School professor George Hay. He said the judge didn't take an approach favored by some that vertical transactions never pose competitive problems, but instead a more straightforward position that the evidence didn't support assumptions underlying the DOJ theory. "The result is not a green light for all possible media mergers but will serve as a roadmap for the kinds of facts merging parties will have to assemble to make their case," Hay said. "And in that sense it will certainly prompt additional media mergers."

Big DOJ Loss

Though Justice could still challenge the deal, its loss was dramatic, agreed many.

Leon's opinion was so fact-based, an appellate court would "have to plunge into that trial record, wallow in it for months," said Robert Lande, University of Baltimore law professor. For DOJ, he said, "at some point, you cut your losses." He said the decision, even though a loss for DOJ, likely won't make the agency more hesitant: Antitrust Division Chief Makan Delrahim, in pursuing AT&T/TW, "knew he was taking a risk and he was willing to take a big risk." Thus if another deal comes up in which the facts raise DOJ concerns, Delrahim "may swallow hard if he thinks it's a big risk, but I don't think it'll make that much difference," Lande said.

The department lost, but it also won, said Fernando Laguarda, faculty director of American University Washington College of Law's Program on Law and Government. By bringing a case that was largely unexpected to test its theories in court, it doesn't need to do more so it probably won't appeal, he said. DOJ "learned a lot ... and showed they have enforcement chops," said Laguarda, who previously was Time Warner Cable vice president-external affairs. He said DOJ would be unlikely to win on appeal and would gain nothing from the effort. He said DOJ sent a message it should be taken seriously if it pursues such an action again, and the agency isn't likely to be hesitant when facing another deal with similar facts.

The standard of an AT&T/TW appeal would be clear error on Leon's part, and that's hard to win, said Boston College Law School Associate Professor Daniel Lyons. But DOJ always knew its case was an uphill battle and if Delrahim was trying to make a statement about agency antipathy toward behavioral conditions in vertical mergers, that could point to it pursuing an appeal to make that statement, he said.

Precedent Limited?

Leon's decision was fact-bound, meaning it doesn't have precedential effect on future cases, said Nebraska's Hurwitz. It tells DOJ "that it needs to seriously up its game if it wants to challenge vertical mergers in the future and that disputed, assumption-based models, 'hot docs' evidence and blustery rhetoric by and about competitors, won't cut it moving forward," he said. He said it's likely companies will be far less willing to accept conditions on vertical mergers to get approval because DOJ will have less credibility in threatening to block deals. He said the result could be fewer, and less onerous, conditions on vertical mergers.

The AT&T/TW decision is so fact-specific that it has "very limited implications" for other vertical deals, and shouldn't be read as anything more than a statement on the legality of that deal, emailed Lina Khan, Open Markets Institute director-legal policy.

Downes said both DOJ and the companies dug themselves in about divestitures, and that likely is now off the table, but the sides still might agree to some form of behavioral conditions, and Delrahim might be more amenable to those than his rhetoric indicated. Downes said a DOJ win would have represented "a radical shift in antitrust law" that resulted in widespread uncertainty about what's allowable due to the novel nature of the DOJ's theory of harm. With Justice losing, many pending deals like T-Mobile/Sprint and either Comcast/Fox or Disney/Fox "look good" under the media market definition that Leon's ruling adopted, he said.

The "court of law" was the winner in Leon's ruling, CTA President Gary Shapiro told us Wednesday at CES Asia in Shanghai. "There was no basis for which that could have been challenged,” said Shapiro of the proposed vertical merger. Like others, he predicted more mergers and acquisitions would prevail as a result of the decision. “It was definitely a message to the Justice Department to stick within the guidelines of the law” rather than trying to create new law, Shapiro said. “Lawyers just want to create something new so they get a name for themselves, and I find that fundamentally unfair to American business, because business should have a predictable legal environment.”

M&A Boon

Wall Street saw the ruling as a potential boon to media M&A.

Barclays analyst Kannan Venkateshwar in a note to investors said Leon adopting a broad definition of the video market could help other vertical and horizontal deals, and no cable network group talking deals today likely has what would be considered must-have content in that a distributor without it can't compete. Barclays also said to expect increased bidding wars over media assets. New Street Research emailed investors that DOJ's inability to prove New AT&T would be able to jack up Turner pricing on other MVPDs and that it took an expansive view of the market, including VOD, could help Comcast in a potential bid for Fox assets.

The court's accepting of AT&T's view of market trends could bode well for Comcast and for T-Mobile in its bid for Sprint as their deals likely will be premised on 5G implications, New Street said. It said between the AT&T/TW decision and the market structure, more media deals are likely coming and there might not be much antitrust difficulty. Raymond James lowered its rating on Comcast Wednesday from "strong buy" to "market perform" on the increased likelihood Comcast would make a formal Fox offer in light of the AT&T/TW decision and potentially get in a bidding war with Disney.

The decision is potentially "the starting gun for the race to consolidate, with other huge mergers on the horizon," Consumers Union said, calling Comcast's then-possible bid for Fox assets "cause for consumer concern." Writers Guild of America West such mergers result in higher prices and fewer choices. Boston College's Lyons said the decision likely will drive more M&A activity as older media companies increasingly experiment with transitioning to a digital environment and away from the traditional cable bundle.