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Oct. 24 — AT&T Inc.'s $85.4 billion deal to purchase Time Warner Inc. faces antitrust hurdles despite being a vertical arrangement due to both its massive size and rapid changes in the media industry.
It could also take over a year for regulators to consider the deal, and the companies could spend millions of dollars seeking approval in the face of widespread skepticism about the benefits of the merger.
“There are good reasons to be skeptical that further consolidation in the communications industry could be good for consumers,” John Bergmayer, senior counsel at digital consumer advocacy group Public Knowledge, said in a statement.
AT&T's purchase of Time Warner is a vertical merger—a tie up between two companies that don't compete directly with each other, but instead are involved in different stages of an industry's supply chain.
Antitrust regulators aren't generally concerned with such arrangements. Since 2000, the Justice Department and the Federal Trade Commission have reviewed around 20 vertical deals that raised antitrust concerns, according to Jennifer Rie, a senior litigation analyst with Bloomberg Intelligence. Of those, one transaction was abandoned and the rest ended in consent orders. None went to court.
This may be one of the rare vertical deals to get closer scrutiny, however. DOJ, which will likely review the merger, has put restrictions on similar deals over concerns platform companies will favor their content over other sources and wall off important distribution channels for entertainment and news.
The deal will likely require a second request for information from either antitrust enforcer beyond what is provided in the companies' initial Hart-Scott-Rodino (HSR) Act notification, which can draw out the review and present technical challenges.
An HSR filing triggers a 30-day waiting period during which the companies can't move toward integration and a second request adds another 30 days. The parties can, however, agree with the government to extend the waiting period for additional review. In reality, most complex mergers result in an even more lengthy review by antitrust regulators.
Responding to a second request is time-consuming. The agencies create detailed, direct market analyses and seek to base those on as much accurate data as they can get. It routinely takes months for both parties to pull together the requested information, a task they must complete before the 30-day clock on the second phase of the investigation starts to run.
Second requests are also costly. According to a survey conducted by the American Bar Association's Mergers and Acquisitions Committee in 2013, the median data production for second requests was over 28 gigabytes of data, or around 1.6 million pages. The median cost of responding to a second request was $4.3 million, with a range of $2 million to $9 million.
The review will be further complicated because the media markets in question are shifting and the merger, in many ways, looks to leapfrog into a digital content market.
The trend of people, especially younger people, watching more content digitally instead of on television is driving the deal, Paul Verna, a senior analyst with research firm eMarketer, told Bloomberg BNA.
AT&T “needs to make bold decisions to embrace this new world,” Verna said. Both of these companies are invested in the pay TV industry, which has been eroding. “They are betting on the fact that, as long as you have content people want, you will be able to monetize it in any platform.”
AT&T also sees content as a way to differentiate itself from the competition, he said. Aside from owning DirecTV, which AT&T bought in 2015, “it owns almost nothing in the way of content.” While Verizon has picked up some content through its AOL and Yahoo deals, their footprint will be immediately eclipsed if the deal goes through.
“These are heavy-hitting, valuable brands: if this deal goes through, there really isn't any comparison any more,” between AT&T and Verizon, Varna said.
But the shifting market and recent acquisitions by rivals that make the deal attractive to the parties also make it more difficult for the DOJ to assess the current market and make confident predictions about what will happen in the future if the agency allows the merger to close.
Any uncertainty will drive the agency to seek more information to get comfortable about the deal, increasing the time and cost to close the merger.
Multiple studies, including an internal review at the FTC, have shown that the average length of an investigation involving a second request is about seven months.
But based on past big media mergers, it could take about a year for the DOJ to reach a consent order to permit the merger if the agency doesn't decide to challenge the deal in court.
Comcast Corp. announced its deal to buy a majority stake in NBCUniversal Media LLC in December 2009 but didn't get government clearance until Jan. 18, 2011, when DOJ and FCC approved the transaction. Antitrust review of Comcast's 2014 proposed purchase of Time Warner Cable Inc. lasted 14 months and resulted in the parties abandoning the deal.
Charter Communications Inc.'s purchase of Time Warner Cable and Bright House Networks, announced in May 2015, cleared DOJ review under a consent order in April 2016.
The parties have set a year as their contractual deadline to complete the merger—before Oct. 22, 2017. If it's still facing regulatory scrutiny at that time, either party can ask to extend the deadline to April 22, 2018.
If the deal still hasn't cleared by then, the parties are both free to walk away. But if the deal fails to achieve antitrust clearance, AT&T will owe Time Warner a $500 million reverse termination fee for its trouble.
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