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AT&T/Time Warner cited as new M&A precedent, but legal experts advise caution

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AT&T/Time Warner cited as new M&A precedent, but legal experts advise caution

AT&T Inc.'s decisive legal victory in arguing that its purchase of Time Warner Inc. would not harm competition in the U.S. video distribution industry is expected to touch off a wave of dealmaking, but legal experts cautioned that the judge's ruling should not be read too broadly.

U.S. District Court Judge Richard Leon not only approved the AT&T/Time Warner deal but also declined to impose any conditions, citing the rapidly evolving video market and intensifying competition among traditional and online video distributors. Read broadly, the ruling could be used as justification for further dealmaking. But Leon himself cautioned against it, writing: "The temptation by some to view this decision as being something more than a resolution of this specific case should be resisted by one and all!"

Comcast Corp. already known to be in the final stages of making an offer for key 21st Century Fox Inc. media assets in a direct challenge to Fox's existing sale agreement with Walt Disney Co. formalized its offer June 13, citing the AT&T/Time Warner decision among other factors in the timing of its proposal. Additionally, Fitch Ratings called the AT&T/Time Warner deal approval "a litmus test for corporate M&A" that could "open the floodgates for additional vertical mergers."

Elizabeth Lim, a senior analyst with the M&A data provider Mergermarket, called the AT&T/Time Warner decision a "sweeping ruling," especially for companies in the technology, media and telecom, or TMT, sector. "Dealmakers are likely to think ... the gates are open for us," she said in an interview.

SNL Image
SNL Image
AT&T and Time Warner buildings
Source: Associated Press

Tony Lenoir, analyst for Kagan, a media research group within S&P Global Market Intelligence, expects TMT companies to view the deal as a judicial green light to merge in order to better compete with vertically integrated over-the-top players like Netflix Inc., Hulu LLC and Amazon.com Inc., all of whom produce, aggregate and distribute content under the same roof.

"I personally think ... AT&T is going to go full-on streaming and mount a real challenge to Netflix," Lenoir said, adding, "If that happens, the other legacy distribution giants cannot afford to fall too far behind."

He noted that Comcast, in addition to its Fox bid, has also made an offer for British pay TV giant Sky PLC and launched a wireless offering in the U.S. under the name Xfinity Mobile, furthering both its content creation and distribution arms.

Lim said the shifting competitive landscape in the video market cannot be ignored. "There is a lot of pressure on the media industry and TMT overall to evolve, and right now is the moment," she said.

She added: "As sectors remake themselves, they'll definitely point to this decision and say we need to do this to survive, just like AT&T and Time Warner."

But legal experts said Leon's order pointed to specific flaws in the U.S. Department of Justice's case against AT&T and Time Warner that might not be relevant to other deals.

"I don't think it opens any general merger floodgates because the opinion makes no change in antitrust law," said Harvard Law School professor Einer Elhauge, who previously served as chairman of the Antitrust Advisory Committee to the Obama campaign, in an interview.

In particular, Elhauge said Leon found repeated "factual flaws in the inputs the government used" to try to establish its case.

Jeffrey May — associate managing editor for the antitrust, banking, and intellectual property portfolio at the legal content and solutions provider Wolters Kluwer Legal and Regulatory U.S. — agreed "the decision is based on the particular facts of this case." But he noted that "You can certainly draw analogies between a deal with AT&T and Time Warner and a deal with Comcast and some other content provider."

May pointed to a particular argument made by the Justice Department that if AT&T bought Time Warner, it would be more likely to coordinate with Comcast to harm competing over-the-top video providers. Leon rejected this argument, saying the "barrier to coordination is so great" that he not only disbelieves AT&T and Comcast would have the incentive to coordinate but he even doubts the two companies would have the ability to do so.

Given this, May said that if a case were to be brought against Comcast over a future acquisition, Leon's ruling "would certainly serve as precedent."