US telecoms group AT&T announced in 2016 it would pay $108bn to acquire Time Warner, owner of HBO which broadcast The Wire
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AT&T’s path to victory against the Department of Justice is simple. The telecoms group just has to convince a federal judge of the atrociousness of both its own business and that of its target, Time Warner.

The US telecoms group announced in 2016 it would pay $108bn to acquire the media owner of HBO and CNN, the cable television networks, as well as movie studio Warner Brothers. Such “vertical” mergers, where two parts of a supply chain combine, are typically less controversial than horizontal combinations where a direct competitor is eliminated.

Nonetheless, the Justice Department has challenged the deal on the grounds that consumers are likely to face higher prices and fewer choices for TV content. AT&T maintains that even with Time Warner (and a formidable enterprise value of $350bn) it would merely be a scrappy underdog.

The brief AT&T submitted in advance of this week’s trial tells the woeful tale. The DirectTV business it bought in 2015 for $67bn has seen its subscriber count fall from 26m to 24m in the past few years. Separately, its core wireless business is stagnant thanks to a mature market and brutal price wars. Since the Time Warner deal was announced, AT&T shares are effectively unmoved, despite being a huge beneficiary of US tax reform.

As for Time Warner, AT&T writes that it is “a stranded wholesaler of video content” (for which it was willing to pay a 35 per cent premium). But it believes that by combining Time Warner’s content factory with AT&T’s mobile know-how it can create a competitor to Netflix, Amazon and the like. It pegs the value of the deal synergies at $25bn, which it says would benefit consumers.

The Justice Department believes AT&T’s real goal is to force Americans to pay premium prices by restricting the supply of Time Warner programming. Each side has duelling legal and economic experts. But given their recent performance, it is hard to imagine legacy media and telecom companies having dominant market power. Uncomfortably for AT&T, the company’s own shareholders may be the best witnesses to testify to its predicament. 

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