I don’t like to use hyperbole, but this situation with the Department of Justice regarding the merger between AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX) is so ridiculous that I can honestly say that Makan Delrahim, the DOJ’s anti-trust chief, has lost his mind.
Delrahim’s position regarding vertical mergers is reasonable — believing that structural remedies are better than behavioral ones. One can argue that behavioral remedies are difficult to monitor and enforce.
And yet — who is complaining about vertical mergers that have allegedly harmed consumers? If behavioral remedies aren’t able to be monitored or enforced, then that means consumers aren’t going to notice changes unless they are gigantic — in which case, complaints would be overwhelming, and then the government would have reason to enforce.
It’s the beauty of the market. The market gives signals.
The Demands on AT&T by the DOJ
The DOJ apparently wants AT&T to divest either Turner TV content properties or DirecTV. AT&T refuses to do so because both are key elements in the merger’s purpose — a new advertising model. So that’s a non-starter.
Yet it’s the DOJ’s claims that allegedly justify its legal position that makes the department look ridiculous. The DOJ claims that by owning lots of content producers, such as Turner’s basket of channels and HBO and CNN, and owning a satellite distribution company, that AT&T would be able to charge local cable TV and satellite providers more for those content channels that it owns. In turn, those providers will pass on the costs to consumers, raising the cost of cable or satellite plans.
The DOJ is clueless. So are advocacy groups that support this position. They all say the same thing. Here’s what the Writers Guild of America says, “The proposed combination of must-have content with vast control over distribution would give the company broad power to undermine competition, restrict access to programming, and raise prices.”
Let’s start with the idea that AT&T would charge other carriers more for its content. There is a bid-ask spread in any transaction. What proof does the DOJ have that the bid would increase to an unreasonable level? If it is too high, other carriers can just walk away.
Yet, that has never happened. We read all the time about how so-and-so cable company is fighting with Channel X over fees and if it isn’t sorted out by Friday, then the channel will go dark. They always reach an agreement because there is too much mutual benefit to having the channel available for the consumer.
Suppose AT&T does raise the fees to an outrageous level, and the other carriers are so scared they just agree, and pass on the increases to consumers? There is a fundamental difference between how people consume media today versus ten years ago. If cable or satellite fees are too high, consumers will cord-cut. They already are cord-cutting. I myself only watch “The Walking Dead” on AMC, so I downgraded by DirecTV subscription to save money, and just put up $25 to stream the season on Amazon.com, Inc. (NASDAQ:AMZN).
Once again, the market will take care of any imbalance. In fact, raises prices unreasonably will be counterproductive to AT&T because it could encourage cord-cutting, and losing both viewers at the DirecTV advertising level, and at the channel level, as all the Turner programming would lose viewers.
This is going to be a debacle for the DOJ. I think AT&T will wipe them out in court. That even assumes they get to court. I suspect this is just the DOJ pushing AT&T to divest something. Nobody wants to go to court, so I bet AT&T will do something that allows the DOJ to save face.
Thus, I believe Time Warner is a buy right now.
With half the merger compensation in cash, and the other half in AT&T stock, I see the merger going out between $102.60 and $107.50. AT&T stock at $34 will deliver the lower end of the deal, and AT&T already trades above that. You could either go long TWX stock here, or buy the April calls.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns TWX calls, and has sold naked puts against TWX stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.