Time Warner and AT&T stepped into the courtroom Monday with Uncle Sam.
The two media companies have been trying to get together in an $85 billion deal that the Justice Department doesn’t want to see happen. The U.S. government filed to block the potential merger in a lawsuit back in November.
The trial — expected to last as long as two months — begins Monday, with reporters banned from bringing electronic devices into the courtroom.
Here is everything you need to know about the case, including why Donald Trump might want to see the deal fall through.
1. The reason the Justice Department says it is suing AT&T and Time Warner.
The government says the merger would harm consumers, with AT&T and Time Warner being able to throw more weight around in the market and enforce higher prices on TV distributors, which would push up cable and satellite TV bills. AT&T could also withhold Time Warner channels like CNN and TNT and from distributors and then up the cost of AT&T’s U-Verse and DirectTV, in this view.
Worse, the DoJ believes the merger would give AT&T what it described in a recent court filing as “a new tool to slow down the development and growth of disruptive online competitors in the future.”
2. The reason AT&T and Time Warner say the government is wrong.
AT&T’s response to the above is basically “trust us.” In its own recent court filing, the company insisted that “nothing will be withheld from competitors; consumer prices will not go up. To the contrary, the government now concedes it would not be profitable for the new company to withhold its television networks from pay-TV distributors and that the new company’s prices to its own television customers will go down.”
The essence of AT&T’s overall defense is that because it doesn’t already own any TV networks, its proposed merger with Time Warner would not reduce the number of competitors in the marketplace. The company states that it views Google, Netflix, Facebook and Amazon as its real competition, with Fox, CBS, Viacom, Disney, and Verizon all being mentioned less in its court filings.
That said, AT&T is also offering a commitment to not black out any TV channels in future fee disputes for a period of seven years, giving up arguably their biggest bargaining chip.
3. What do AT&T and Time Warner stand to lose?
A lot of money. Time Warner could say goodbye to $85 billion — with a b — if the deal falls through. That estimate comes from AT&T’s offer of $107.50 per share for the proposed new company, which would give any Time Warner stockholder who bought shares in the company before news of the possible merger broke at least 36 percent profit on their investment.
Conversely, Time Warner shares dropped below $100 after the government filed its suit last fall, prompting low-to-medium investor confidence in the merger ever happening. In other words, a failed merger is going to leave Time Warner with a lot of extremely disappointed stockholders. Probably not the high note CEO Jeff Bewkes, who plans to step down at some point after the deal closes, hopes to go out on.
AT&T would also have to pay Time Warner a $500 million reverse breakup fee if the merger fails.
4. Why do they want to get together in the first place?
AT&T’s goal in buying Time Warner is to earn bigger profits through targeted advertising, by mixing their consumer data with Time Warner’s TV content.
5. How is this going to affect the rest of the media world?
Bigly. If the deal falls through, it could set a precedent that would make deals like Disney’s planned purchase of $52.4 billion in 21st Century Fox assets, a possible CBS and Viacom merger, or Comcast’s bid for Sky TV, far less likely. That’s a lot of money at stake.
Unless, of course, you think the real reason the Justice Department doesn’t want Time Warner and AT&T hooking up is because of POTUS.
6. What’s Trump got to do with all this?
But a large number of observers, including AT&T CEO Randall Stephenson, are, uh, skeptical. Because Time Warner owns CNN — and President Trump hates CNN. A lot.
Trump made his disdain for the network known repeatedly during the 2016 presidential campaign. He also vowed to stop the merger in his first 100 days in office. That didn’t happen, but one thing Trump did do during his first 100 days is use the presidential bully pulpit to dis CNN as often as he could.
Meanwhile, the Justice Department’s newly-appointed antitrust chief, Makan Delrahim, initially didn’t oppose the merger. He even told an interviewer just after it was announced that “I don’t see this as a major antitrust problem.” However, Delrahim switched his position on the matter at some point — exactly when isn’t clear — and when he took the DoJ job last November, he began expressing concerns about it.
Delrahim’s current position is that AT&T must sell off Time Warner’s Turner unit — which houses CNN — in order to move forward on the merger. AT&T said no to that proposal, at which point the government sued. AT&T intends to call Delrahim as a witness, due to his pivot after appointment by the Trump administration.
In short, if skeptics are correct — and there is nothing but speculation, it should be made clear — then this is about one merger, not all mergers. Which means Disney might yet gobble up Fox regardless of what happens here.
7. Who is calling the shots?
The bench trial (meaning no jury, just a judge) will be decided by Judge Richard Leon, who previously presided over Comcast’s acquisition of NBCUniversal in 2011. In that case, Leon OK’d everything pending the adoption of rules set to prevent potential harm to consumers and competition, like forfeiting management rights of Hulu.
8. What are the possible outcomes?
The judge could say yes or no — or as with Comcast/NBCU, allow for certain conditions. In the third case, the Justice Department would most likely argue no conditions could prevent consumer harm and it would be too expensive for the government to monitor any conditions that might work.
AT&T would fire back that they already have a key condition set up: their commitment to not block out Time Warner channels in any future disputes, and putting disagreements in the hands of third-party arbitration.
9. Why doesn’t the government like that third option?
Delrahim is skeptical that the “behavior remedy” with Comcast did any good and doesn’t believe the government should be messing with for-profit business affairs. In this case, it appears the Justice Department would prefer the “structural remedy,” of AT&T selling Turner (getting rid of CNN) as part of the deal — a one time thing the government wouldn’t need to monitor later.