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AT&T, Time Warner Offer A Self-Reg Merger Solution

But condition-shy Justice Department could prove a hard sell 12/04/2017 8:00 AM Eastern

AT&T is indulging in some do-it-yourself antitrust review before the Justice Department, offering up its own behavioral condition for its $108.7 billion merger with programming giant Time Warner Inc. after the DOJ refused and in hopes that it could still negotiate approval of the deal.

In a somewhat surprising move, AT&T pledged that for seven years after the merger is approved its Turner networks — consisting of such popular channels as TNT, TBS, Cartoon Network and CNN — would never go dark. AT&T said Turner would agree to adhere to “baseball-style” binding arbitration in instances where it can’t come to terms with cable operators, satellite providers and other distributors, adding that its networks would remain available to distributors throughout negotiations.

That condition would seem to let the air out of DOJ’s biggest argument against the merger — that a combination of AT&T, the largest U.S. pay TV provider, and Time Warner, the second-largest content company, would exert its tremendous market influence to either raise the price of its programming to competitors or make its content exclusive to its own distribution arm, satellite-TV provider DirecTV.

Shades of Comcast-NBCU

It is a template similar to one that both sides of the political aisle have used as an example of how vertical integration does or doesn’t work — Comcast’s 2011 purchase of NBCUniversal, which passed Justice Department scrutiny under a Democratic administration, with behavioral conditions.

An even bigger compromise would be for DirecTV to submit to baseball- style arbitration — in which an arbitrator chooses from two acceptable figures, one submitted by each party — in all of its programming deals, Telsey Advisory Group analyst Tom Eagan said. He wasn’t sure AT&T would go that far.

“They’d be telling CBS, they’d be telling Viacom, they’d be telling Discovery, we’ll make it easy for you on the DirecTV distribution,” Eagan said, adding that AT&T chairman and CEO Randall Stephenson’s claim that the company doesn’t have the market power of internet giants like Google and Facebook misses the mark.

“DirecTV is the biggest video provider in the country, so I don’t think it is quite valid to compare yourself only to Google and Facebook,” he said. “You can’t compare how many users there are on Facebook to how many video subscribers are on DirecTV.”

Before the Justice Department filed suit against the deal on Nov. 20, DOJ antitrust chief Makam Delrahim said he favored divestitures over such conditions in vertical mergers, saying he saw the condition route as tough to enforce, and as essentially allowing an illegal deal under certain terms, then trying to make sure those terms were met.

Given that view, it could be tough for AT&T to convince the Justice Department that its behavioral condition resolves those government’s concerns.

Days after Delrahim laid out that theory on vertical mergers, the DOJ put the theory into practice by bringing suit in federal court to block the deal, signaling AT&T-Time Warner would need to divest the Turner programming assets.

Only days after that, AT&T and Time Warner last week filed their response to the suit. Its prominent feature was the kind of behavioral condition it had been expecting to have imposed by DOJ. The companies professed to be somewhat perplexed by what they saw as an abrupt reversal of a half-century’s worth of precedent in vertical mergers, which Stephenson described more bluntly as a “meat ax” taken to the rule of law.

The companies pointed out that agreeing to the seven-year binding arbitration committment had been good enough for Comcast-NBCU, and should be sufficient in this case as well. They said, perhaps a bit hopefully, that they “fully expected to resolve the government’s review of this merger by agreement, rather than litigation.”

Analysts Buy In

The DOJ may take some convincing, but some analysts agreed with AT&T-Time Warner that the condition should grease the skids.

“It would be difficult for the DOJ to argue that this commitment doesn’t effectively address their most important argument,” MoffettNathanson principal and senior analyst Craig Moffett said.

Perhaps, but Delrahim clearly signaled he had issues with such conditions.

“[H]ow can antitrust lawyers hope to write rules that distort competitive incentives just enough to undo the damage done by a merger, for years to come?” Delrahim said. “I don’t think I’m smart enough to do that.”

AT&T and Time Warner can only hope he concludes that their lawyers can.

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