The government’s star witness in the antitrust trial of AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX) has been on the stand this week. UC Berkeley professor Carl Shapiro has been trying to demonstrate price increases that might allegedly occur should the merger be permitted to go through.
One of the biggest, if not central, complaints by the Department of Justice regarding the merger is the Turner networks would allegedly be able to charge higher fees to other content distributors. Those distributors would, in turn, pass those increases on to consumers. It doesn’t make a whole lot of sense, for many reasons that I’ve covered in previous articles.
The general idea is that because AT&T will own Turner content, that it will make it more expensive for other distributors to have those channels, since it has its own distribution platform in DirecTV.
U.S. District Judge Richard Leon almost seems to be doing AT&T’s defense work, because he questioned whether the Turner networks will take orders from parent company AT&T, that would be of benefit to DirecTV. The judge recalled a NBC Universal executive who testified that negotiations with Comcast Corporation (NASDAQ:CMCSA) cable competitors were handled directly, and that he took no orders from his parent company, Comcast.
Not only that, the government does not apparently want to even address the underlying flaw in their argument. The whole reason for the merger, according to AT&T, is to create and leverage an advanced advertising model in business.
AT&T is not going to withhold Turner programming from competitors, because then it loses the eyeballs that it so desperately needs. As with every carriage negotiation, there will be some give-and-take, but it is far more advantageous for AT&T to let Turner programming go at historical rates in order to capture the additional advertising revenue.
Shapiro instead argued that if AT&T didn’t use its perceived leverage that it would be “leaving money on the table”. Apparently he didn’t get the memo regarding the purpose for this merger.
He also doubled down on the idea that with two vertically integrated entities, namely AT&T/Time Warner and Comcast/NBCUniversal, they would allegedly coordinate to withhold programming in a way that would harm new online distributors. That literally doesn’t even make any sense.
Attorney Dan Petrocelli got Shapiro to admit that such a risk was not based on any kind of quantifiable model. Shapiro also took some time to talk about the alleged possible cost increases to consumers.
In reading over the testimony from government witnesses since the beginning of the trial, I simply do not understand why the DOJ let this make it to trial. Their witnesses have not held up very well, their arguments have been week and there does not appear to be any legitimate compelling reason why the merger should be blocked.
As we know, anything is possible when it comes to court. However, unless AT&T manages to repeatedly stab itself and its vital organs when it puts on its case, I see absolutely no reason why the judge will block this merger.
The market seems to agree as it has slowly been building up TWX stock, which now sits close to $96. Given that the merger was initially targeted to go out at $107.50-per-share, I still see upside of at least $8-per-share here and possibly more.
I would buy Time Warner stock here, because even if the merger is blocked, Time Warner stock has been delivering solid earnings and will continue to do so in the future.
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 shares of, and calls on, TWX stock. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected]