One of the most significant antitrust rulings of recent decades

AT&T, Time Warner and the Entire Media Merger Frenzy Explained

From AT&T and Time Warner to the hot pursuit of 21st Century Fox and Sky, media mergers are in full swing. Why now? WSJ’s Amol Sharma answers all your questions about the forces driving media deals. Photo: Getty Images

WASHINGTON—A federal judge ruled Tuesday that AT&T Inc. T 0.50% can proceed with its planned acquisition of Time Warner Inc., TWX 0.05% rejecting the Justice Department’s allegations that the deal would suppress competition in the pay-TV industry.

U.S. District Judge Richard Leon announced his decision in a packed courtroom, ruling that antitrust enforcers at the Justice Department hadn’t proven their case against the merger.

“I conclude the government has failed to meet its burden,” Judge Leon said. “The court has now spoken and the defendants have won.”

In a highly unusual conclusion to the court session that underlined the magnitude of AT&T’s victory, Judge Leon urged the government to let the companies close their deal without further legal interference.

The judge said he hoped the Justice Department would have the “wisdom” not to seek an emergency stay of his ruling, saying such a legal maneuver would be “manifestly unjust” to AT&T and Time Warner.

The decision, in one of the biggest antitrust cases in decades, is a milestone victory for AT&T as it looks to reposition itself in a rapidly evolving media landscape. Its deal for Time Warner, valued at roughly $80 billion, has been pending since October 2016.

The ruling could set of a round of media mergers. Other companies have been waiting to see how the AT&T case turned out, includingComcast Corp. CMCSA 1.19% , which has been planning a bid to buy the bulk of 21st Century Fox ’s FOX 1.18% assets. Any such offer could raise similar concerns with the Justice Department.

The acquisition means AT&T will be the nation’s top pay-TV distributor, through its ownership of DirecTV, as well as the owner of some of the country’s most sought-after channels: Time Warner’s Turner networks—including CNN, TBS and TNT—as well as HBO, the most popular U.S. premium network.

The decision conversely hands the Justice Department’s antitrust division one of its most stinging losses ever.

“We are disappointed with the Court’s decision today,” Makan Delrahim, chief of the Justice Department’s antitrust division, said in a statement shortly after the ruling. “We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner.”

The department will review the ruling, he said, and “consider next steps.”

Creation of a Giant

AT&T spent decades snapping up rivals and neighbors. It’s now the largest U.S. pay-TV provider and second-largest wireless operator by subscribers. Time Warner has both added and shed assets but remains among the biggest players in film and TV.

Decades of consolidation

AT&T Corp.

Born 1877 as the Bell Telephone Co.*

Lucent and NCR spun off

AT&T Wireless

Cingular

McCaw Cellular

AT&T

DirecTV

Leap

Wireless

BellSouth

Southwestern Bell

Name changed

to AT&T

Pacific Telesis

Ameritech

Market cap

$211B

$75

Time Inc./Time Magazine debuts in 1923

Time Inc. magazine

division spun off

Name changed to

Time Warner Inc.

AOL spun off

America Online

Time Warner

Becomes

AOL Time

Warner

TBS

Time Warner Cable

spun off

Warner Communications

created in 1969

Sells Warner

Music Group

’05

’00

’95

’15

1985

’10

Pre-1984

’90

Market capitalization, in billions

AT&T + Time Warner

Dish

Network

$15

Viacom

$12

$20

CBS

$69

$155

$202

$824

$158

$794

$149

$557

$75

$286

Comcast

Netflix

Charter

Disney

21st

Century Fox

Verizon

Google

Amazon

Facebook

*Bell Atlantic, NYNEX and U.S. West became Verizon

Sources: staff and news reports; FactSet (market caps)

Speaking to reporters outside the courthouse, AT&T’s lead attorney Daniel Petrocelli described the decision as “a sound and proper rejection of all of the government’s arguments to stop this merger.”

“We are elated,” Time Warner spokesman Gary Ginsberg said outside the courtroom. “We look forward to completing the merger.”

The case marked the first time in 40 years that a court had seen a fully litigated challenge to a so-called vertical merger that combines companies at different links in the same supply chain. Such cases are considered more difficult for the government to win than the typical “horizontal” merger case, where the government challenges the combination of two head-to-head rivals and the loss of competition is more apparent.

Judge Leon’s ruling underscored why the department has been hesitant to challenge vertical deals outright, and the decision could lead the Justice Department to be gun-shy about making the attempt again in a future case.

Comcast’s offer would seek to disrupt Walt Disney Co.’s DIS -0.02% $52.4 billion all-stock deal with 21st Century Fox, announced in December.

Response to Judge Leon’s verdict was brisk in after-hours trading, with AT&T falling 2.2%; Time Warner rising 4.1%; Comcast dropping 4.9%; and Disney sliding 1.4%.

AT&T argued the deal was essential for the company’s future in the digital space. The company says acquiring Time Warner is a central part of its plan to compete with the likes of Facebook Inc. and Alphabet Inc.’s Google for advertising dollars. It wants to use Time Warner’s content to build a new ad platform that can deliver targeted commercials based on the customer’s viewing preferences and personal data, though trial proceedings also revealed that AT&T believes that such a platform presents significant execution risks.

The deal will give AT&T an ability to provide new video offerings and incentives to its 93 million domestic wireless subscribers. CEO Randall Stephenson announced on the witness stand that the company intends to give its wireless customers on unlimited data plans a free bundle of channels using Time Warner’s content.

The Justice Department’s concerns about the merger focused heavily on its belief that AT&T would have the incentive and ability to use Time Warner’s Turner networks as a weapon against DirecTV’s cable and satellite television rivals. The department argued that AT&T, which bought DirecTV in 2015, would be able to use the threat of a Turner blackout to force rivals to pay higher carriage fees for the networks, which would mean higher prices for consumers.

A Plan for Every Season

AT&T already bills millions of Americans for landline, wireless and pay-TV service. The Time Warner acquisition lets AT&T keep a bigger chunk of what they pay for entertainment.

Potential AT&T customer ranges, annual fees

Time Warner offerings

TW

$6,260

$2,952

$1,380

THE BARGAIN HUNTER

THE DREAM CUSTOMER

THE BUNDLER

COST

PRODUCT

COST

PRODUCT

COST

PRODUCT

$2,280

AT&T Unlimited

Plus Enhanced

AT&T Mobile

Share Flex 5GB

Cricket Wireless

2GB Plan

$360

$1,200

DirecTV Premier

+ HBO

$1,536

$2,172

AT&T Internet

DirecTV

+ Internet 100 Mbps

+ Home Phone

+ NFL Sunday Ticket

$396

$180

WatchTV*

+ NBA League Pass

$200

TW

+ HBO

$216

TW

$132

+ Filmstruck

subscription

TW

$1,080

$840

AT&T Internet

1000 Mbps

AT&T Internet

50 Mbps

TV and

internet

on one bill

*Product not yet launched Note: Prices exclude first year promotions and vary by location.

Source: the companies

The department faced difficulties throughout the six-week trial, which ended in April. Judge Leon limited how Justice Department lawyers questioned certain witnesses and expressed visible skepticism of testimony by the government’s chief economic witness, who presented an empirical model that predicted the deal would lead to small but significant price increases in monthly cable bills. AT&T countered with its own academic economist who said it wouldn’t.

President Donald Trump wasn’t a focal point of the proceedings, but his campaign pledge that he would block the deal if elected to the White House cast a political cloud over the case, particularly in light of his repeated criticism of how Time Warner’s CNN covered his administration.

The Justice Department’s Mr. Delrahim, a Trump appointee who previously served as a deputy White House counsel, has said repeatedly that politics played no role in his decision to file the lawsuit. The companies questioned the Justice Department’s motives from the outset of the case, but Judge Leon headed off their efforts to make allegations of political interference an issue during the trial.

JUDGE LEON’S OPINION

Read the full opinion

The DOJ’s loss Tuesday breaks a banner streak of success for the department in blocking mergers that antitrust officials believed were anticompetitive. In recent years the department felled two major health insurance mergers, Anthem Inc.-Cigna Corp. and Aetna Inc.-Humana Inc., the oil-field-services merger ofHalliburton Co. and Baker Hughes Inc. and another pay TV deal: Comcast’s plan to buy Time Warner Cable, a company that is separate from Time Warner and has since been acquired by Charter Communications Inc.

Write to Brent Kendall at brent.kendall@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com

Appeared in the June 13, 2018, print edition as ‘AT&T Beats U.S. in Antitrust Fight.’

COURTESY: WSJ

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