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OFFRE ETE Zonebourse : Jusqu'à 6 mois offerts sur tous les portefeuilles

AT&T : Decoding Judge Leon's AT&T-Time Warner Decision -- Update

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06/13/2018 | 02:08am CEST

By Joe Palazzolo, Ashby Jones and Rebecca Davis O'Brien

Judge Richard J. Leon, in his 172-page opinion Tuesday, allowed AT&T Inc.'s proposed merger with Time Warner Inc., to go through, over objections by the U.S. Justice Department that the deal, if consummated, would have anticompetitive effects and violate the antitrust laws.

Below are highlights and analysis on Judge Leon's opinion.

--Page 1: "If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!"

Judge Leon is the rare federal judge who makes liberal use of exclamation points.

--Page 1: "According to the government, consumers nationwide will be harmed by increased prices for access to Turner networks, notwithstanding the Government's concession that this vertical merger would result in hundreds of millions of dollars in annual cost savings to AT&T's customers and notwithstanding the fact that...no competitor will be eliminated by the merger proposed vertical integration."

Tea leaves! If you're the government, this paragraph is a very bad sign indeed.

--Page 4: "Ultimately, I conclude that the Government has failed to meet its burden to establish that the proposed 'transaction is likely to lessen competition substantially.'"

By the fourth page it is over: Judge Leon is ruling against the government.

--Page 38: "The Government's own expert predicts that, due to a standard benefit of vertical integration, AT&T's DirecTV and Uverse customers will pay a total of about $350 million less per year for their video distribution services."

Judge Leon castigates the government's main witness, UC Berkeley economist Carl Shapiro. It won't be the last time.

--Page 49: "To say the trial was well staffed would be an understatement. Thirty-two lawyers entered appearances for the Government, and 14 did so for defendants....In total, I admitted into evidence over 3,000 pages of documents, broken up into over 120 exhibits. The trial transcript itself exceeds 4,300 pages in length."

U.S. v. AT&T Inc. was a big, big undertaking.

--Page 54, footnote 17: "I will nevertheless pause to mention briefly why I am confident that defendants will achieve considerable efficiencies beyond those conceded by the Government....The efficiencies, defendants explain, come both on the 'cost' side, and on the 'revenue' side. By defendants' calculations, cost synergies will total $1.5 billion and revenue synergies $1 billion on an annual basis. On the cost side, AT&T's John Stankey testified that the marriage of AT&T and Time Warner will lead to the elimination of redundant positions in each company, achievement of certain economies of scale, and insourcing of services that the acquired entity currently acquires from vendors. And on the revenue side, AT&T and Time Warner expect to see the gains in innovation -- particularly by way of a new programmatic advertising platform -- that motivated the merger in the first place."

Judge Leon, earlier in this footnote, makes clear that he can effectively end the inquiry by determining that the government failed to prove that the merger would reduce competition. Still, he goes out of his way to show the efficiencies that AT&T will gain through the purchase of Time Warner. In other words, he's laying it on thick here, writing that, sorry government, the merger won't only avoid harmful effects, but will promote beneficial ones.

--Page 58: "Given all of the competing considerations at play, the 'analysis of vertical mergers' has been described as 'much more complex than the analysis of horizontal mergers.' Things are made more difficult still by the lack of modern judicial precedent involving vertical merger challenges -- a dearth of authority that is unsurprising, considering that the Antitrust Division apparently has not tried a vertical merger case to decision in four decades!"

Judge Leon's observation is largely borne out by the opinion itself, which seems to rely as much on antitrust insights from experts as it does from case law, or precedent established by previous judicial rulings.

--Page 68: "The Government's primary theory of harm to competition focuses on the challenged merger's integration of Turner's important video content -- content that includes, among other things, the networks CNN, TNT, and TBS -- with AT&T's video distributors, U-verse and DirecTV. Specifically, the Government contends that, should the challenged merger proceed, Turner's relationship with AT&T will enable Turner to extract greater prices from AT&T's rival distributors for its 'must-have' content than it could without the merger. The Government argues that distributors would then pass on those price increases to their subscribers, resulting in an increase of hundreds of millions of dollars in annual consumer payments."

Here, at the beginning of the deep dive into the antitrust analysis, Judge Leon gives a nice encapsulation of the government's theory, i.e., that postmerger, AT&T will be positioned to force its competitors to pay premium prices to carry Time Warner (Turner) networks, like CNN.

--Page 75-76: "Based on the evidence, I agree with defendants that Turner's content is not literally 'must have' in the sense that distributors cannot effectively compete without it. The evidence showed that distributors have successfully operated, and continue to operate, without the Turner networks or similar programming...I therefore give little credit to blanket statements by third-party competitor witnesses indicating that the entire 'viability of [their] video model' could depend on whether they offer Turner programming."

In other words, competitors are unlikely to feel forced to purchase Time Warner's content -- and pay elevated prices -- given that the content isn't "must have," or entirely vital to the competitors' ability to compete.

--Page 90-91: "In short, despite the Government's efforts to paint a contrary picture, this is not a case containing direct, probative evidence of anticompetitive intent on the part of high level executives within the merging company. Stephenson's statements and the Government's other proffered documentary evidence instead suggest, at the very most, that AT&T...recognized that one possibility of uniting content and distribution would be to withhold or otherwise limit content from other distributors in an attempt to benefit AT&T's distribution platforms. But evidence indicating defendants' recognition that it could be possible to act in accordance with the Government's theories of harm is a far cry from evidence that the merged company is likely to do so (much less succeed in generating anticompetitive harms as a result)."

Here's Judge Leon diving into the evidence. He simply doesn't buy the government's attempt to frame AT&T discussions about the potential anticompetitive effects of a merger as proof that they'd behave anti-competitively were the merger to go through.

--Page 99: "For the reasons discussed above, the Court is not convinced that the 'real-world objective evidence' offered by the government provides sufficient support for its increased-bargaining leverage claim. That conclusion is further bolstered by evidence relating to three prior instances of vertical integration in the video programming and distribution industry....[Witness and expert testimony] both provide significant, real-world evidence indicating that, contrary to the Government's increased-leverage theory, these prior instances of vertical integration did not affect affiliate fee negotiations or content prices."

Here, Judge Leon cites News Corp's acquisition, in 2003, of DirecTV, which it spun off in 2008; the 2009 split of Time Warner from Time Warner Cable; and the 2011 combination of Comcast and NBCUniversal.

--Page 100: "...neither the Government nor professor Shapiro presented original analysis of any prior vertical transactions in this industry."

Back to Berkeley economist Carl Shapiro. Here's Judge Leon pointedly calling Mr. Shapiro's argument that AT&T would have leverage over rivals an "assumption," without "an independent basis of evidence." That scrutiny -- and Judge Leon's skepticism of Mr. Shapiro's testimony -- is a central thread in his decision, which goes into great detail about the shortcomings of Mr. Shapiro's models and analysis.

--Page 101: "Defendants, by contrast, did seek to analyze the available pricing data resulting from prior instances of vertical integration. Although they initially had trouble obtaining some of the relevant pricing data from the Government or third-parties...they were eventually able to obtain the data after seeking relief from this Court. Defendants' lead economic expert, Professor Dennis Carlton, then analyzed that third-party pricing data, among other proprietary and public-source data in his possession to test whether it is "true that content prices are higher on a network when it's sold by someone who's vertically integrated."

A lesson: Get yourself an expert who is thorough. Judge Leon has high praise for AT&T's lead economic expert, Dennis Carlton -- an economist from the University of Chicago's Booth School of Business and a former deputy assistant attorney general in the DOJ's Antitrust Division -- who, in Judge Leon's opinion, performed a thorough analysis of third-party pricing data, plus a regression analysis, using a variety of statistical techniques.

--Page 108: "The Government seems to believe that any 'postmerger' testimony given by Time Warner executives should be 'discount[ed]' as potentially biased because it was given by interested employees of a defendant company. Poppycock!"

Poppycock! Judge Leon notes here that the executives' testimony "doesn't involve promises or speculations" about the merger, but is instead based on their "prior experiences," testimony supported by Mr. Carlton's analysis.

(MORE TO FOLLOW) Dow Jones Newswires

06-12-18 2007ET

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Sales 2018 156 B
EBIT 2018 29 810 M
Net income 2018 17 202 M
Debt 2018 116 B
Yield 2018 6,19%
P/E ratio 2018 11,57
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