AT&T and Warner: when politics meddles with business
On October 22nd 2016, the telecommunication company AT&T broke the news when it announced the world it would be merging with Time Warner. More than a union of two giants, it is the size of the merger that struck the public’s attention, amounting to $85.4 billion. As for many significant alliances, this union attracted a lot of detractors, one of which cannot be ignored. The day of the merger’s announcement, President Donald Trump was quoted saying that:
“AT&T is buying Time Warner, and thus CNN,” […] “a deal we will not approve in my administration.”
He stated that this “power structure” as he called it was aiming at suppressing his vote and voices of his supporters. A little over a year after those statements were issued, the Government is threatening to sue the merger, we ought to ask ourselves why politics would interfere into a business deal. Furthermore, are the claims justified?
The main complaint that was brought up was that of the antitrust nature of the deal but also the fact that too much media power would be concentrated into the hands of one single entity, thus threatening the freedom of speech. It is important to highlight that this merger was the largest proposed deal of 2016 and that probably explains why it was exposed to a lot of criticism. Nonetheless, one could argue that the nature of this merger is quite peculiar. Indeed, a vertical merger like this one, between AT&T, a telecommunication distributor and Warner, as creator of content is not frequent. The two companies might operate in the same sector but yet, do not compete directly and provide a different value along the supply chain. Besides, with the rise of companies such as Netflix, Amazon Prime and YouTube to name a few, the stakes become very high for AT&T that needs to position itself as a leader and gain bargaining power. That is why critics are arguing that a horizontal merger with a direct competitor such as Vodafone or T-Mobile, would be in the company’s best interest.
Only 3 years ago, Time Warner turned down Fox News’s bid to acquire the company for $80 billion and proceeded to see their stock decline from $86 to $64 after the announcement was made public. Looking at that unsuccessful merger, some experts raised concerns regarding the fact that this merger might have negative consequences on the stock market due to its size but also to the fact that Time Warner Inc. stock is largely overvalued. Indeed, half the merger will be funded with cash. The other part will be in shares at a striking $107.50 a share, which is a premium of 35% of what the stock was trading at before the news about the merger broke.
Furthermore, when it comes to mergers, it is expected that the EV/EBITDA value of the purchasing company should be higher. AT&T’s ratio in 2016 was of 7.39x and as you can see in the chart from Bloomberg, it was below its target company scoring a 9.2x. However, despite all those reservations, AT&T still went on with the deal. But now it is another unforeseen issue that it is facing.
Concerns were voiced ever since the deal was announced. As we mentioned previously, president Donald Trump said several times that the merger would be challenged in court if necessary. Is justice overstepping its bounds? We must not forget that the main stakeholders in this critical issue are the customers. And if their interests really are the fundamental consideration of the DOJ and other detractors, then all their concerns can be put to rest. Indeed, in reality it seems that the audience might actually benefit from this merger as the intensified competition could give rise to better content and maybe even better prices. It is the very same anticompetitive argument that AT&T is raising and antitrust experts have stated that the DOJ just needs clarification on the direction that the new alliance will be taking and the economic implications on the consumers. Thus, if they provide sufficient research and proof to the court, the latter should approve the merger. Concerns were however raised that the court should not take the president’s tweets and public declarations into account like it did for the muslim travel ban.
The Department of Justice officially filed a lawsuit on November 20th, 2017 to block the acquisition of Time Warner, which is the second time in six years that AT&T is being sued by the DOJ. The first time was in 2011 when the company tried to acquire T-Mobile US Inc. Compared to the latter, the AT&T-Time Warner merger is of a vertical nature as it is looking to bring together a content provider and telecommunication provider. However, the Washington Justice Department’s Antitrust Division normally deals with horizontal mergers which raised the question of their implication in this issue.
“Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently.” David . McAtee II – general counsel of AT&T stated
The fear that there will be a concentration of media can be seen as legitimate as people are scared that the two giants will use their combined power to overcharge consumers and rivals but also hinder innovation by becoming the main provider of content. Although, companies like Amazon and Netflix produce their own content, a lot of them rely on others either for content or for distribution. Facebook’s streaming of videos for example heavily relies on Buzzfeed. The biggest issue seems to be CNN whose sale would facilitate the validation of the merger. After all, the network accounts for most of Time Warner’s revenues overall. These two claims however are not valid on the grounds that, although this union could influence prices, that is the case and the aim of pretty much all mergers. Besides, a significant increase in prices could only be carried out by a company in a monopoly position. CNN is one of the leaders in the industry but we must not forget networks such as TNT, TBS and HBO that benefit from a significant audience and sometimes actually rank.
All in all, it seems like Time Warner is not going to let the jewel of its crown go quite so soon as Time Warner issued a statement in August saying that “CNN is not for sale”. Moreover, Randall Stephenson, the CEO of AT&T stated earlier this month:
“Until now, we’ve never commented on our discussions with the DOJ, […] But given DOJ’s statement this afternoon, it’s important to set the record straight. Throughout this process, I have never offered to sell CNN and have no intention of doing so.”
After his statement was issued, Time Warner shares were down 6% on November 8th. It had already dropped by 4% on November 2nd when it was announced that the Wall Street Journal was preparing for litigation.
A lot of people wonder if this issue is going out of proportion and ask whether it has more to do with Donald Trump and his personal vendetta against CNN supporting Hilary Clinton during her campaign. Whatever the answer is, the latest DOJ filing by virtue of the antitrust issues do not hold and have been criticized by a lot of experts in the field. A professor at Stanford Law School went as far as saying that the government might have a case. But not under the current laws as none are being violated by this merger. However, one thing is sure: this is the biggest antitrust court case since the 90s and we will definitely keep an eye out to see how it unfolds.
Source: AT&T Newsroom, Reuters, EY – 2016 and 2017 Private Equity Survey, Bloomberg & Bloomberg Law, Yale LawSchool, Financial Times
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