In a case that has all the merger arbs watching with rapt attention, federal district judge Richard Leon will deliver his ruling Tuesday afternoon on the long-awaited DOJ lawsuit to block telecoms giant AT&T's push to buy Time Warner, a deal that would transform AT&T into a combined telecom-media giant similar to rival Comcast. The lawsuit has been the subject of wide-ranging speculation from the start, given President Trump's rhetoric, stretching back to the campaign, when he first came out against the deal. And proponents of the deal haven't been able to stop themselves from speculating about whether Trump's views may have influenced the DOJ's decision to pursue the case.
The arbs are feeling undeniably optimistic about AT&T's prospects, seeing as they've pushed Time Warner's share price closer to the $102.87 a share offered by AT&T. That's driven the market-implied odds that the deal succeeds higher.
The list of firms with the largest exposure to Time Warner shares is about what one might expect, with massive fund managers like Vanguard and BlackRock clocking in as the two largest investors.
Judge Leon is expected to announce his decision on the long-delayed $85 billion deal at 4 pm ET on Tuesday in a Washington DC courtroom that will likely be packed with journalists, lawyers, investors and others. The chaos will be exacerbated by the parade celebrating the Washington Capital's Stanley Cup win, which is slated to conclude at 3 pm just a few blocks from the courthouse. Leon is a venerable judge who has served on the bench since 2002. But Leon has a reputation for being unpredictable in his decision making. And the revelation that AT&T paid Michael Cohen $600,000 for "insight" into Trump's thought process has lent a patina of shadiness to the whole affair. And regardless of what he decides, Leon's decision will have a major impact on M&A case law, because before the DOJ sued to block the merger, there just weren't that many deals like AT&T-Time Warner, which is notable because of its so-called "vertical" nature; typically, deals involve the takeover of one competitors by another.
With that in mind, here are three possible outcomes of today's decision, courtesy of Bloomberg:
Leon is expected to deliver remarks from the bench before his final ruling appears on the court’s docket. He may read extensively from the legal reasoning that went into his decision, so beware of premature conclusions based on his review of each side’s case.
He can rule in AT&T’s favor and deny the government’s request for an injunction, side with the Justice Department and block the deal on antitrust grounds, or rule it illegal, but allow it to go forward by meeting conditions aimed at protecting competing pay-TV companies that want access to Time Warner programming.
The government has suggested an alternative to blocking the deal: requiring AT&T to sell its DirecTV unit or preventing it from acquiring Time Warner’s Turner Broadcasting.
In a twist that lends an academic dimension to the case, both AT&T and the DOJ centered their cases around the arguments of two economists.
A central component of the trial was competing economic theories. The Justice Department offered Professor Carl Shapiro of the University of California at Berkeley, whose report formed the backbone of the Justice Department’s suit. AT&T countered with University of Chicago Professor Dennis Carlton who was called to the witness stands to poke holes in Shapiro’s arguments. AT&T Chief Executive Officer Randall Stephenson, a serial acquirer with 33 takeovers completed in his 11-year run at the helm, got to pitch for his career capper.
Of course, if Leon nixes the deal entirely, an outcome that would likely send TWX shares lower (while benefiting shares of T), the arbs will get crushed, and there will be a lot of unhappy investors leaving that courtroom. It would also rob AT&T CEO Randall Stephenson of what would've been a career-capping deal after the serial acquirer has presided over 33 takeovers in his 11-year run at the helm of AT&T (still, some might say Stephenson's ability to hang on to his CEO post in the wake of the Cohen revelations, which claimed a scalp when AT&T's policy chief, Robert Quinn, was ousted, is a career-defining victory in and of itself).
Bracing for the possibility that Leon could throw Trump a bone and require Time Warner to spin off Turner Broadcasting, Buzzfeed reported earlier this year that CNN was already shedding employees to make the cable news network more marketable should it soon find itself on the auction block.