A new warning sign has just appeared in the seemingly endless regulatory review of AT&T's proposed $85 billion takeover of Time Warner. While the deal certainly isn't dead, a report now suggests that the US Department of Justice is equally weighing conditions it might impose on the merger and a possible antitrust lawsuit it could impose to block the transaction.
According to The Wall Street Journal, the DOJ antitrust division is preparing its lawsuit in case the government can't come to terms with AT&T Inc. (NYSE: T) on ways to mitigate the company's increased market power in buying Time Warner Inc. (NYSE: TWX). The WSJ isn't making a prediction on the outcome of the deal based on this information, but it is opening up further speculation on the idea that the merger could still be dismantled despite AT&T's continued insistence that it expects the deal to close by the end of the year.
AT&T has repeatedly argued that its buyout of Time Warner meets government antitrust guidelines because the deal is a vertical merger. In other words, AT&T isn't buying up a direct competitor, but rather taking over a company that sits further up in the media delivery chain.
Bringing weight to AT&T's argument is the fact that the government approved Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s acquisition of NBCUniversal earlier in the decade. In theory, the DOJ could make the argument that AT&T has a national distribution footprint where Comcast has only a regional one, and thus the AT&T deal is a greater threat to competition. However, given the convergence of the cable market and the likely eventual national or near-national reach of cable companies, that argument is probably a disingenuous one. (See Does AT&T Deserve Time Warner?)
There is still reason for the government to be concerned about AT&T's acquisition of Time Warner. By owning both a major programmer and a prominent distribution channel, AT&T would gain a major advantage over rivals without the same assets. Notably, it could keep the costs to license Time Warner content high for others while offsetting those costs for itself through the high margins in its broadband business. By significantly undercutting competitors on price, AT&T could effectively drive other distributors out of the market.
However, Comcast hast the same advantage. And the question is, can the DOJ make a case that the AT&T deal is unreasonable given its earlier decision on Comcast/NBCU?
AT&T released an official statement on the WSJ news saying, "When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios. For more than 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market. While we won't comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception."
AT&T stock is trading own slightly this afternoon on the Wall Street Journal story. Time Warner stock is down roughly 4%.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading