AT&T's Dream Deal Hangs on Judge's Decision


AT&T
Inc.


T 1.46%

and

Time Warner
Inc.


TWX 0.58%

have spent nearly two years planning and defending their tie-up, a marriage of necessity designed to take on bigger digital rivals.

A federal judge will only need a short time Tuesday afternoon to make it official or—if government antitrust enforcers prevail—block the deal, sending both companies back to the drawing board.

U.S. District Judge Richard Leon’s decision will come down through the most analog medium: He’s planning to announce it in open court at 4 p.m. ET, the culmination of a 20-month legal slog that’s absorbed both companies’ time and attention while their industry changes around them.

A win for AT&T and Time Warner will vindicate their leaders’ survival-of-the-biggest philosophy, creating a vertically-integrated giant with movie studios, television channels, satellites, cellphone networks and fiber optic cables all under the same roof.

The roughly $275 billion combined market capitalization would top traditional peers’ and narrow a wide gap with technology companies like Google owner

Alphabet
Inc.

and

Facebook
Inc.,

which have themselves spent billions of dollars dabbling in telecom and entertainment.

Beyond the two merger partners, the decision will be felt throughout the telecom and media industries, where several potential deals—including

Walt Disney
Co.’s

and

Comcast
Corp.’s

pursuit of

21st Century Fox

—hang in the balance. It will also help shape antitrust enforcement under President

Donald Trump,

whose pick to run the antitrust unit of the Justice Department decided to bring the case.

“This decision will likely serve as the litmus test for other potential M&A and has broad implications for stocks in the cable, telco and media space,” said UBS analyst John Hodulik.

The companies faced minimal visible adversity during the six-week trial, which saw Judge Leon ask tough questions about the Justice Department’s antitrust case against the deal. Litigation, however, is difficult to predict and some of the judge’s questions were expected, because the department has the burden of proof in the case. It argues the deal would harm competition and likely lead to higher prices for consumers.

As the trial wore on, the government argued that Judge Leon didn’t necessarily need to block the whole deal, saying it would be enough if, for example, the judge blocked AT&T from owning Time Warner’s Turner networks. AT&T said any ruling along those lines would be a deal killer. (See the Journal’s complete coverage of the trial.) 

A loss for the companies would come as a stinging defeat for AT&T CEO

Randall Stephenson,

who bet the company’s future on media ownership instead of doubling down on the wireless business. AT&T’s stock has dropped 15% over the past two years and growth in wireless and pay-TV subscribers has stalled.

Intense interest in media assets and a soaring stock market mean Time Warner’s value could suffer less in the event of a court defeat. Still, a ruling in the government’s favor could scare away other potential suitors in telecom, potentially limiting the New York company’s options.

Judge Leon could also bless the deal but impose his own merger conditions governing the behavior of the combined firm. Tougher limits on AT&T’s operations could hamstring the company for years and put it on uneven footing with Comcast, which will have rules over its ownership of NBCUniversal lifted later this year.

The losing side could have to decide in a matter of days whether to appeal Judge Leon’s decision. The companies’ merger agreement is currently set to expire on June 21. Both the government and the companies have been considering appellate options in case they lost, according to people familiar with the matter.

Mr. Stephenson has described the purchase as a crowning piece of his strategy to keep the heir to Ma Bell from losing ground to newer entrants in its own market. He testified in the trial that the current pay-TV landscape reminded him of his company’s landline telephone business, which coasted along until it didn’t.

“We used to kid ourselves into thinking, you know, it’s not declining that fast, and before long, it was gone,” he said, adding that AT&T’s video-delivery business was showing the “same trajectory.”

Time Warner likewise faces an existential challenge. TV watchers are growing less patient with the increases to their already hefty monthly bills, making providers like Comcast and AT&T’s own DirecTV less willing to pay billions of dollars to carry the media company’s channels. Revenue from traditional TV ads, meanwhile, is falling industrywide.

“It is a double whammy,” Time Warner CEO

Jeff Bewkes

testified in April. “It means that the financial support for all this programming on all these different channels gets pushed over toward subscription prices. And that’s a problem, because we think consumers are up to here with subscription prices.”

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Brent Kendall at brent.kendall@wsj.com



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