You know the famous scene in “Dead Poets Society” where the students stand up one by one on their desk and say “O Captain, my Captain!” in salute of Robin Williams, while the headmaster struggles to maintain order?
That’s a lot like what’s going on with the U.S. media and telecommunications industry right now.
One by one, major companies are standing up and declaring their wish to consolidate in a frantic attempt to prepare for the next decade. The most recent example was this week’s announcement that number-three wireless carrier T-Mobile and number-four Sprint would merge.
But we don’t know if Donald Trump’s regulators will have more luck in controlling the rebellion than the movie’s headmaster.
“The DOJ and the FCC are analyzing each deal on its own merits, but they can’t do that without looking at the other deals and wondering what the combined effect will be of the deal they’re looking at plus the other proposed deals that are out there,” said Scott Wagner, a partner at Bilzin Sumberg and chair of the Federal Bar Association’s Antitrust and Trade Regulation Sector.
Sprint and T-Mobile announced their deal at the same time that AT&T is trying to buy Time Warner, Disney is attempting to acquire $52 billion of Fox assets, and Comcast has overbid Fox to buy U.K.-pay TV provider Sky for about $31 billion. CBS and Viacom are also in the midst of merger discussions which may result in a deal.
That’s well over $200 billion of M&A in the same industry.
There are several reasons these moves are all happening at once. For one, deals take a while to get approved. AT&T announced it was acquiring Time Warner for $85 billion back in 2016, and it still doesn’t know if it will be able to close the deal. The government sued to block the transaction, and AT&T challenged the decision in court. That trial ended this week, and a verdict is coming June 12.
Similarly, Sprint and T-Mobile have considered merging for at least five years, with several stops and starts.
Second, each deal begets the next. So, if number-two wireless carrier AT&T can buy Time Warner, that puts more pressure Sprint and T-Mobile to come together — size is crucial in the capital expenditure-heavy wireless business, especially as companies spend tens of billions on wireless spectrum through government auctions and corporate acquisitions.
Third, millions of consumers are cutting their pay-TV bundles, choosing to buy cheaper online options from Netflix, Amazon Prime, Hulu and others.
This has caused a panic in the media industry, pushing Rupert Murdoch to sell the bulk of Fox to Disney and Shari Redstone to put together CBS and Viacom. BTIG media analyst Rich Greenfield likens it to the penguins huddling up in a ball to stave off winter in “March of the Penguins.”
Many suspected Trump would usher in an era of large-scale consolidation.
But the DOJ’s decision to block AT&T’s Time Warner acquisition didn’t jibe with that narrative. Those two companies don’t directly compete, but the DOJ sued because it felt AT&T’s control of Time Warner would lead to higher prices for bundles of TV channels.
The DOJ should be even more likely to shoot down a horizontal merger that consolidates an industry with four participants to three, as in the case of T-Mobile-Sprint, says Ketan Jhaveri, a former DOJ trial attorney and antitrust lawyer at Simpson Thacher & Bartlett.
“Anyone would tell you suing to block a vertical deal, which is much more complicated, and not blocking a horizontal case would be a weird way to decide antitrust policy,” Jhaveri said. “But we’re living in a time where these contradictions may not matter anymore.”
Jhaveri gives the deal a 40 percent chance of approval but said it would have had only a 10 percent chance in an Obama administration.
The approval of T-Mobile-Sprint will hinge on a classic antitrust question: do regulators think a deal will mean higher prices for consumers?
One antitrust watcher thinks the risks of an government block are high.
A deal “would increase concentration significantly in the highly concentrated mobile wireless market, creating a structural dynamic that positions the deal with a difficult path to antitrust clearance,” according to an April 30 note to clients from The Capital Forum, a news and analysis firm dedicated to government regulators.
“Little has changed on the competitive merits since August 2014, when the companies abandoned merger talks in response to DOJ and FCC opposition” says Teddy Downey, The Capitol Forum’s executive editor and CEO.
However, if Judge Leon does allow AT&T to buy Time Warner, T-Mobile and Sprint’s chances greatly improve, according to Wagner, the Federal Bar Association’s antitrust chair.
AT&T will be that much bigger and stronger, strengthening the argument that Sprint and T-Mobile can only compete by coming together.
“It’s never a safe bet to say a 4-to-3 consolidation will get approved, but Sprint and T-Mobile have a better argument than most,” Wagner said. “They’ll argue that AT&T and Verizon are such behemoths that they only way they can bring down prices for everyone, not just their own customers, is to get big enough to really put pressure on them.”
A loss for the DOJ may also make the regulatory body gun-shy to block another deal, Wagner said.
“Regulators don’t like to lose,” Wagner said. “They won’t want to take two big losses in a row.”
But if Judge Leon does shoot down AT&T-Time Warner, all bets are off. It could be back to the drawing board for the entire industry.
Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.
Donald Trump's regulators are the only thing holding back a massive American telecoms revolution