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Judge backs $80 billion Time Warner deal as media companies eye wave of consolidation

By Brent Kendall and Drew FitzGerald 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 13, 2018).

WASHINGTON -- A federal judge ruled Tuesday that AT&T Inc. can proceed with its blockbuster acquisition of Time Warner Inc., without any conditions, marking a historic defeat for the Justice Department that could rewrite the media landscape and set the stage for other deals.

U.S. District Judge Richard Leon told a packed courtroom that the department hadn't proved its case that the deal would suppress competition in the pay-TV industry.

At one point waving his 172-page opinion in the air, Judge Leon declared: "The court has now spoken and the defendants have won."

The moment provided a final act of drama in a case that carried the highest stakes for the two companies, their leaders and the Trump administration's antitrust enforcement. President Donald Trump was unusually direct in opposing the deal, both before and after taking office, giving the case an unusual political cast.

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, now valued at roughly $80 billion, has been pending since October 2016.

The ruling could set off a round of media mergers. Other companies have been waiting to see how the AT&T case turned out, including Comcast Corp., which has been planning a bid to buy the bulk of 21st Century Fox Inc.'s assets. The decision will give ammunition to Comcast as its argues to Fox and its shareholders that a tie-up between the companies could withstand a regulatory review. A Comcast offer would disrupt Walt Disney Co.'s $52.4 billion all-stock deal with 21st Century Fox, announced in December.

Underlining the magnitude of AT&T's victory, Judge Leon took the unusual step of urging the government to let the companies close their deal without further legal interference.

Judge Leon 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 acquisition means that AT&T, already the nation's top pay-TV distributor through its ownership of DirecTV, will now also control some of cable TV's best-known channels, including HBO, CNN, TNT and TBS, as well as the Warner Bros. TV and film studio.

Judge Leon made headlines during the trial when he questioned whether a key Justice Department theory, backed by a well-respected economist, was a Rube Goldberg contraption.

He went a step further Tuesday in his strongly worded opinion. "In fairness to Mr. Goldberg, at least his contraptions would normally move a pea from one side of a room to another," Judge Leon wrote.

The decision 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."

Mr. Delrahim attended Tuesday's hearing and sat stone-faced as he listened, occasionally taking notes as the judge spoke. Some of the 100 spectators in attendance had camped out overnight, or hired line-standers, to win a seat. The judge barred people from the leaving until he was done, and he commanded that there be no celebrations -- or consolations -- in his courtroom. Everyone abided by the orders.

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 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.

Judge Leon disagreed, saying AT&T's rivals could compete even if they didn't have Turner. He also rejected two other government arguments: that AT&T might restrict rivals' use of Time Warner's HBO, and that the postmerger company could impede upstart online rivals offering video content on the internet.

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.

Response to Judge Leon's verdict was brisk in after-hours trading, with AT&T falling 2.8%; Time Warner rising 4.5%; Comcast dropping 3%; and Disney sliding 1.7%.

The decision is a career-defining victory for AT&T CEO Randall Stephenson, who refused the government's demands that AT&T divest a major piece of Time Warner to get clearance for the deal.

In less than three years, first with the purchase of DirecTV and now Time Warner, the AT&T veteran has transformed the phone carrier he inherited into one of the world's biggest entertainment companies. But now he will need to deliver returns for shareholders despite slowing growth in the wireless market and the rise of cord-cutting and internet rivals.

For Time Warner's boss, Jeff Bewkes, the deal's approval vindicates his strategy of dismantling the Time Warner empire, spinning off assets such as AOL, Time Inc. and Time Warner Cable in order to create the most attractive target for a potential buyer.

AT&T said it plans to close the deal in coming days. Mr. Stephenson, who has run AT&T since 2007, plans to make few sudden changes to Time Warner's management, according to people familiar with the matter. Mr. Bewkes is expected to leave the company after a transition period.

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 of Halliburton 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

(END) Dow Jones Newswires

June 13, 2018 02:47 ET (06:47 GMT)

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