AT&T's bid to acquire Time Warner for $85.4 billion two weeks ago created a sensation within the telecoms and media business, headlining most discussions at industry events and interactions. But very quickly it became apparent that the deal would face intense regulatory scrutiny. (See Merger Musings: TW + AT&T = ?.)
Analysts at MoffettNathanson LLC have used the time since the pact was announced to interview 20 regulatory experts about the deal's chances of being approved, and today published a report on their findings.
The analysis contained in the report was largely conducted prior to the U.S. Department of Justice (DoJ) suing DirecTV for its negotiations related to carriage of Dodgers games in Los Angeles. Naturally, this is likely to lower the odds of approval for the deal as discussed in the report. (See US Justice Dept. Sues DirecTV for Collusion.)
MoffetNathanson also pointed out that Time Warner Inc. (NYSE: TWX) shares are trading at about 24% lower than the AT&T Inc. (NYSE: T) offer price of $107.50, which suggests the market doesn't expect the deal to go through. MoffetNathanson estimates that the market gives the deal a 33% chance of success.
Unfortunately, even among experts it seems that there is little consensus on the likelihood of the deal going through. Before the research, MoffetNathanson thought the probability of the deal going through was 50-50, and that's still about where they stand after all the research. For me, it just underscores how unstructured and unpredictable the entire process is, particularly at the FCC.
Analysts spoke to or exchanged emails with three former FCC chairmen; five former FCC Commissioners and/or Bureau Chiefs; five EVPs of Public Affairs at Telecom and Media companies; three former FCC chief economists and/or former FCC attorneys; two senior staffers to Congressional telecommunications subcommittees, and five academics and/or telecom anti-trust attorneys or other telecom policy experts.
A key issue they all agreed on was that the involvement of the Federal Communications Commission (FCC) would significantly affect the chance of the deal going through. While approval will require the blessing of the DoJ, the FCC's role is less clear. The FCC's involvement, according to the experts interviewed, would be driven by various licenses held by Time Warner for the broadcast and otherwise distribution of content. If these were transferred to AT&T, the FCC would need to review them.
Some experts pointed out that these licenses could theoretically be transferred to a third party of a trust to avoid this, but they agreed this would not be a good idea for AT&T. Time Warner tried to do so during the AOL merger, and it ended up "backfiring" on them, according to one interviewee.
As another put it, "
if they [the FCC] want to be involved, they will be."
MoffetNathanson asked interviewees to place odds on the involvement of the FCC, and most settled around the 70-79% range, with only one seeing it as less than 50%.
There was some disagreement over whether the FCC's involvement made approval less likely or not, but generally across the group, it seemed the odds would be reduced if the commission did get involved. Some interviewees put it considerably more strongly.
According to one senior FCC official, for AT&T an "FCC review would be similar to
Another said "AT&T would rather give up their firstborn than face the FCC."
This is because the DoJ and the FCC take very different approaches to reviewing such major acquisitions. The DoJ tends to use more objective criteria and has to perform a "negative" test, i.e., the government has to show clear antitrust harm resulting from the merger, to block it.
In contrast, the FCC can "decline to approve", based on more subjective criteria. According to an interviewee, the FCC decision is based on the public interest, and this is defined by their understanding of it, i.e., there is no empirical formula.
However, others felt that the FCC was more likely to look to extract concessions rather than block the deal altogether.
Obviously, politics are also important -- the next president would probably be important in deciding how aggressively the FCC chose to be involved. But both Hillary Clinton and Donald Trump have come out against it, and as one interviewee put it, any new president would be "hard-pressed to be seen as giving the green light to an $80 billion megadeal" at this time.
All involved agreed, however, that this would be a long process. Approvals were likely to come through only after about 18 months, in 2018.
Some did point to the approval of Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s acquisition of NBC Universal as an example of a similar deal, but they also acknowledged that many in the FCC regretted approving it, and may act differently today.
According to MoffetNathanson, the odds of success are still at 50% -- slightly higher or lower depending on the interviewee and under different scenarios. One interviewee also pointed out that it may be rejected [by the DoJ], but then AT&T could have the DoJ decision reversed if it challenged the ruling in court. That person gave the acquisition a 65% chance of success in this scenario.
Incidentally, this sat roughly in between a range of 35% and 90%, as estimated by other interviewees.
Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation