FOX Fox Corporation

Antitrust landscape changes with suit against AT&T-Time Warner merger. Will Comcast-Fox talks be affected?

By Keach Hagey and Joe Flint 

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 (November 25, 2017).

In the past year, every single one of the biggest media companies in the U.S. has either agreed to a transformational merger or considered one. Now the industry is trying to figure out what the Justice Department's lawsuit to block AT&T Inc.'s acquisition of Time Warner Inc. means for other deals.

Analysts have been especially interested in weighing the potential impact on Comcast Corp.'s desire to acquire a significant chunk of 21st Century Fox's assets.

Comcast is continuing its talks with Fox and doesn't think the proposed deal would face the same regulatory hurdles because the vast majority of the revenue from the Fox assets in question comes from overseas, said a person familiar with Comcast's thinking.

Plus, Comcast already owns content from its prior acquisition of NBCUniversal. Therefore, the media giant sees the acquisition of some Fox content assets as more of a "horizontal" deal of like businesses rather than a "vertical" merger akin to AT&T-Time Warner.

But others question that thinking. A Comcast/Fox deal would combine a content provider and a distributor -- similar to the AT&T deal that the Justice Department is arguing is illegal.

"How could Comcast buy more content if AT&T can't buy Time Warner?" asked Rich Greenfield, an analyst at BTIG Research.

The Wall Street Journal reported last week that Comcast was one of several suitors in talks to buy Fox's studio, some U.S. cable networks such as FX and National Geographic, and its international businesses.

Of course, it's possible that AT&T will win its case and be able to buy Time Warner. AT&T CEO Randall Stephenson said Monday that the company was ready to square off against the government in court. The healthy performance of most media stocks on Tuesday -- the first trading day after the government filed its suit -- suggests investors may be betting the government doesn't have a strong case.

But while the litigation drags on, M&A in the sector is likely to take a "four- or five-month pause," Mr. Greenfield said.

The pause comes as the industry is under intense pressure from the acceleration of cord-cutting, the growing power of tech companies such as Netflix, Amazon and Facebook, and a wave of consolidation among pay-TV distributors that has left the giants of media searching for a transformational next move.

This fall, those pressures led Walt Disney Co. to reach out to Fox to discuss buying a substantial piece of its entertainment assets. Although the talks have cooled, they helped put Fox in play. Fox has since been approached by a host of suitors including Comcast, Sony and Verizon, the Journal has reported.

Analysts and investors are now trying to analyze which combination may be acceptable to antitrust officials. Telsey Advisory Group analyst Thomas Eagan wrote in a research note that the DOJ's suit and clear concerns about vertical mergers makes it difficult for Comcast or Verizon to purchase Fox assets, leaving Disney -- and possibly Sony -- as "the only real buyer."

For Comcast, there are also other factors to consider. For one, some antitrust experts have argued that the government didn't do enough to limit Comcast's power when it took control of NBCUniversal in 2011. Comcast would also be acquiring Fox's movie and television studios, making it an even larger producer of content and reducing the number of major studio, which could be a concern for regulators.

Comcast is also interested in buying Fox's regional sports networks, according to the person familiar with Comcast's thinking, assets that weren't under discussion with Disney.

21st Century Fox and Wall Street Journal parent company News Corp share common ownership.

The interest in Fox marks just the latest in a series of merger talks across the media industry over the past year: Discovery Communications struck a deal this summer to acquire Scripps Networks International. Last year, Viacom Inc. and CBS Corp. explored a merger that would have reunited the companies a decade after their separation.

"Six months ago, the market believed that the industry was poised to see further, significant and maybe unprecedented consolidation over the next several years, driven as much by defensive tactics -- building a moat around the business -- as offensive," said William Drewry, founding partner at Pursuit Advisory, a boutique advisory firm specializing in media. "Now that is under serious question."

Indeed, it is exactly this kind of moat-building that the Justice Department said it is trying to prevent. In the complaint filed on Monday, one of the reasons it cited for blocking the deal was that a merged AT&T-Time Warner would have the power and incentive to slow the growth of new online video distributors that are disrupting its business. (Mr. Stephenson has said that the point of buying Time Warner was to take its content and give it broader distribution, not more limited distribution.)

Some analysts believe a horizontal merger between two content providers -- the kind of deal that traditionally receives more scrutiny from antitrust officials because it eliminates a direct competitor -- might still be able to pass muster in today's regulatory environment, precisely because it doesn't pose the same risks to new online entrants.

Guggenheim Securities analyst Michael Morris argues that Time Warner could still conceivably merge with Disney, Fox or CBS -- should the AT&T deal fall apart.

Write to Keach Hagey at keach.hagey@wsj.com and Joe Flint at joe.flint@wsj.com

(END) Dow Jones Newswires

November 25, 2017 02:47 ET (07:47 GMT)

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