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Deal advisers brace for chain reactions following M&A approval, bidding war

Following the unconditional approval of AT&T Inc.'s acquisition of Time Warner Inc. and the subsequent Comcast Corp. bid for 21st Century Fox Inc., numerous M&A advisers for the media and telecommunications industries stand to gain from an increase in deal activities.

The AT&T legal victory is a boon for advisers on the deal, which, if the deal was denied, stood to lose millions of dollars. Time Warner's advisers Allen & Co. and Citigroup Inc. each collected their full fee of $50 million after the closing of the deal, and Morgan Stanley will collect $40 million. If the deal didn't go through, the advisers would have only received their fairness opinion fees of $5 million each. Fees for AT&T's advisers were not disclosed.

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That would be a relief for advisers that participated in failed transactions in the past. For example, in 2014 Allen & Co. lost $17.5 million, while Citi and Morgan Stanley each lost $28.5 million, when the Comcast-Time Warner Cable deal was scuttled as regulatory doubts proliferated. Many observers expected the AT&T-Time Warner merger to face similar resistance.

At $84.76 billion, the AT&T-Time Warner transaction ranks as the largest media and telecommunications deal since 2014, according to S&P Global Market Intelligence data. For the top 10 deals on that timeline, Morgan Stanley ranks as the third most-used adviser with four contracts and Allen & Co. and Citi rank as the fourth most used with three contracts each. JPMorgan Chase & Co. has advised on five of the top media and telecom deals since 2014, and it advised AT&T on its Time Warner acquisition.

The most tapped adviser for the top 10 media and communications deals was Goldman Sachs Group Inc., with six contracts on the list. It was not involved in the AT&T-Time Warner deal, but it is advising 21st Century Fox on its proposed merger with Walt Disney Co., where it will receive $58 million if that deal closes.

However, with its opposing bid for 21st Century Fox, Comcast could have a hand in Goldman Sach's losing the majority of that purse. After the approval of the Disney-Time Warner merger, Comcast made a $65.01 billion all-cash offer to 21st Century Fox, which topped Disney's initial $55.27 billion all-stock offer. Disney has since revised its bid, now offering $38 per share in either cash or shares of Disney common stock, immediately replacing the Comcast bid as the second-largest deal announcement on the timeline.

Comcast will use Bank of America Corp. and Wells Fargo & Co. to advise on the Fox deal, but it had not listed fees for those banks as of June 16. As for legal agent, Comcast will work with Davis Polk & Wardwell. A successful Comcast-21st Century Fox combination would be the largest media and telecommunications advising contract for Davis Polk, with the second-largest being Sprint Corp.'s 2004 bid for Nextel Communications Inc. according to data from S&P Capital IQ. Comcast uses Davis Polk often, with the two partnering on more than 100 transactions listed in Capital IQ, and Davis Polk is also advising on Comcast's outstanding bid for Sky PLC, which would rank just behind the Sprint-Nextel deal in value.

Wachtell Lipton Rosen & Katz will also be a legal adviser for Comcast on the 21st Century Fox bid. The law firm worked on several high-profile telecommunications deals and counts companies like AT&T, Charter Communications Inc., T-Mobile US Inc. and Verizon as clients. This would be its first advising contract with Comcast, and one of the firm's largest to date.

In terms of deal volume, there were 1,586 media and telecom deals in 2017 valued at $136.64 billion in aggregate. By comparison, 2016 saw 2,006 deals valued at $166.70 billion, according to S&P Global Market Intelligence data. That said, based on deal value, 2018 is already moving fast. With the first half coming to an end, there were 662 deals at a hefty $100.99 billion in deal value. That puts the year already over 2014 on a deal-value basis, when 2,043 deals were valued at just $94.53 billion in aggregate.

Industry dynamics are primed for consolidation, said Tom Oser, a professor at the University of California, Los Angeles, Anderson School of Management and principal at Pipeline Strategies Consulting, a management consulting firm. The expansion of video distribution platforms and content means the appetite for vertical integration is growing, and there must be deals of all sizes under increased consideration in light of the favorable court ruling for AT&T, Oser said in an interview. Oser's consulting firm counts major video operators and TV networks as clients.

Oser's UCLA colleague, Jay Tucker, executive director at the Anderson Center for Media, Entertainment & Sports, agreed that there could be a ramp-up in M&A activity as the regulatory walls have seemed to lower in the case of AT&T and Time Warner. "People are waking up to the idea that the media and communications spaces are a much larger ecosystem," Tucker said in an interview. "It's not so much that this particular ruling … is the license for everyone to link up with other companies, but I will say it changes the calculus."

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