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AT&T-Time Warner's $85B deal faces regulatory cloud

October 23, 2016

AT&T Inc.’s planned $85 billion takeover of Time Warner Inc. mirrors Comcast Corp.’s successful acquisition of NBCUniversal, but the latest pairing faces a potentially rockier path through Washington as the Democratic and Republican presidential nominees both express suspicion of blockbuster deals.

While the Comcast-NBC deal won approval from regulators in 2011 with conditions aimed at protecting competition, AT&T faces a new landscape after a spate of high-profile merger challenges by antitrust watchdogs and a new administration months away from taking office.

“This is such a big deal in a set of markets that are already very concentrated in which there are already real concerns about consumer abuses,” said Chris Sagers, a law professor and antitrust expert at Cleveland State University. “It’s definitely going to get a very careful look.”

Millions of subscribers

AT&T CEO Randall Stephenson, after acquiring DirecTV last year, is transforming the Dallas-based phone company into a media and entertainment giant. Buying Time Warner would give AT&T -- already a top U.S. supplier of pay-TV, mobile phone and home internet services -- premium entertainment programming including HBO, professional basketball and the Cartoon Network to offer its millions of subscribers.

Even though the deal would combine programming and distribution rather than two direct competitors, the takeover still raises potential antitrust problems, said John Bergmayer, senior counsel at Public Knowledge, a Washington-based policy group. AT&T could make it difficult for competitors to get Time Warner programming, hoping to drive customers to its own platforms, while DirecTV could decline to carry rival programming, he said.

“If you’re just a video distributor that doesn’t own programming, you just want the best programming. But if you own programming, the thumb is going to be on the scale for your stuff as opposed to that of competitors because it’s cheaper for you and you make more money off of it from ads,” Bergmayer said.

Similar concerns were raised by the U.S. Justice Department and the Federal Communications Commission when Comcast agreed to buy NBC. Officials said the deal gave the cable company an incentive to disadvantage competitors by denying them access to NBC programming or raising their licensing fees. Whether Comcast’s pay-TV rivals refused to purchase the programming or agreed to pay the higher fees, Comcast would benefit from weakening its competitors, the government said. Higher licensing fees would also induce customers to switch to or stay with Comcast, it said.

Conditional approval

To resolve those concerns, Comcast agreed to a series of conditions, in place for seven years, that were intended to ensure that rival pay-TV distributors could gain access to NBC. Comcast was also prohibited from discriminating against rival programming. AT&T may find tougher sledding, according to analysts and lawyers.

“I don’t think there is any way you can look at this and believe it’s a slam dunk,” said Rich Greenfield, an analyst at BTIG in New York. “AT&T is about to buy one of the world’s largest content companies. How can you be super confident?”

AT&T and Time Warner said Saturday that by combining they will be able to compete nationwide with cable companies by bundling mobile broadband and video. If the companies can persuade regulators that that is the case, it might improve the odds of approval with conditions, said Amanda Wait, an antitrust lawyer at Hunton & Williams LLP in Washington.

Still, AT&T will receive close scrutiny from regulators, lawmakers and state attorneys general, she said. “This is going to be a multifront war,” she said.

FCC’s role

Time Warner holds an airwaves license for a TV station in Atlanta, potentially giving the FCC power over the deal in a review that wouldn’t happen until after the Nov. 8 presidential election. The merging companies might be able to sell the station, WPCH, to avoid FCC scrutiny, said Andrew Jay Schwartzman, an instructor at Georgetown University’s law school in Washington.

“The wild card in all this will be the FCC,” said Roger Entner, an analyst with Recon Analytics LLC. “It’s hard to predict what the regulators will do. They are pretty much starting with a blank page.”

Hillary Clinton, the Democratic nominee for president, holds a significant lead in the polls as the Nov. 8 election approaches and has been critical of megamergers. But even her opponent, Donald Trump, broke with Republican orthodoxy on Saturday by saying he would block the Time Warner acquisition, arguing that such deals leave too much power concentrated among too few companies. He also suggested he would favor a break up of

Comcast and NBC

While Democrats’ increasing suspicion of corporate consolidation could increase risk to the deal, a Clinton administration probably would approve it, in part because agencies have let through similar takeovers that don’t reduce the number of competitors, Paul Gallant, a Washington-based analyst for Cowen and Co., said in a note.

‘Historical precedents’

“The historical precedents are favorable and, at first glance, we see no significant differences with other comparable deals that won approval,” he said.

Democrats added a commitment to toughen antitrust enforcement in their party platform this year for the first time since 1988, while Clinton in campaign literature calls for “reinvigorating” antitrust enforcement. The Democratic nominee, who applauded recent challenges to two health-insurer mergers, called for robustly enforcing antitrust laws to prevent “excessive, harmful economic power.” She also promised more resources and staffing at antitrust agencies. Clinton’s campaign didn’t respond to a request seeking comment about the Time Warner deal on Saturday.

Even though Comcast won approval for NBC, antitrust officials at the Justice Department made clear they were ready to rethink their approach to evaluating harm to competition from mergers when, four years later, they opposed Comcast’s proposed takeover of Time Warner Cable. The Justice Department looked past the fact that the companies’ cable operations didn’t overlap and found potential harm to online video rivals because the combined company would control much of the market for high-speed internet service.

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