November 2011

[Commentary] Given how incredibly unlikely AT&T is to win approval of its acquisition of T-Mobile at this point, why is AT&T drawing this out? Do they really think they can win in court? Why not just call it quits, or vow to fight it out before the Federal Communications Commission’s administrative law judge?

I think a number of things are going on here. First, AT&T was, once again, caught by surprise on the timing. FCC Chairman Julius Genachowski played this like a total master. He kept his cards close, counting on his reputation for avoiding political conflict with powerful entities like AT&T, then sprang it on them when Congress was out of town and AT&T could not pull together powerful political pushback. The announcement that the Chairman would do this on circulation, rather than wait 3 weeks for the December Public Meeting¸ further limited AT&T’s options.

Caught by surprise with very limited options, AT&T had two choices: 1) try to tough it out and lobby like hell to prevent a vote, or 2) try to pull the applications to avoid an hearing designation order (HDO). Between these two bad choices, AT&T probably made the right calculus. It seems extremely unlikely that AT&T could prevent a vote for the HDO. Neither Democrat is likely to undercut both the Chairman and the Department of Justice, even if he or she wanted to vote against it. Nor is it certain the FCC Commissioner Robert McDowell would vote against a designation for hearing. As I have observed before, Commissioner McDowell is not a corporate shill so much as a true believer in the Gods of the Marketplace. This is precisely the case where Commissioner McDowell might say: “Well, this is definitely the thing to do, refer to a hearing rather than leverage our authority to extort concessions. There are real questions about market power here, and they ought to be resolved by a hearing as required by law.” Heck, this kind of once-in-a-blue-moon vote is precisely the sort of thing that burnishes credentials as a genuine believer in the free market rather than simply pro-big business.

AT&T can still hope to renegotiate the breakup fee with Deutsche Telekom (DT) by stretching out the proceeding. If DT knows it can’t get the deal done, it will want to unwind as quickly as possible so it can maximize the value of T-Mo to another buyer, or as a standalone initial public offering (IPO). While one Wall St. analyst recently valued such an IPO at $28 billion, that will decline if T-Mobile remains shackled to the deal and continues to experience churn as a result. So AT&T may be content to have the case in abeyance before the district court. At this point, keeping the case open is the only leverage it has to renegotiate the breakup fee. If the case is in abeyance, AT&T can threaten to leave it that way until the breakup fee comes due in September 2012 unless DT agrees to renegotiate the fee downward.

Mark Lie, was among thousands of Tribune shareholders who cashed out when the media conglomerate went private in 2007. And like those others, he stands to lose some of his winnings if junior creditors succeed in their legal bid to claw back more than $2.5 billion of the $8.2 billion in proceeds from Tribune's disastrous leveraged buyout.

Lies and his fellow shareholders are caught in a legal battle that may be the most perplexing yet in a Tribune bankruptcy that has groaned on for three years. The junior creditors, led by New York hedge fund Aurelius Capital Management, claim that the complex deal orchestrated by Chicago billionaire Sam Zell was a fraudulent conveyance, doomed to fail from the start. If the buyout is proved to be a fraudulent conveyance, creditors argue, investors shouldn't have benefited, and proceeds from their stock transactions should be made available to satisfy the $2.5 billion that creditors claim they are owed. In all, 33,000 to 35,000 investors are potentially on the hook for money they received in 2007, when the company went private at $34 a share. Defendants include thousands of current and former employees of Tribune. Many others are people around the country like Lies who had nothing to do with the company — they simply bought the stock. It is far from clear that the creditors' maneuver will work. And defendants warn that if Aurelius and its allies prevail, markets that depend on the sanctity of a settled transaction could be disrupted by making it difficult for investors to assess risks in participating in a leveraged buyout.

On the face of it, the death or decline of flat-rate pricing from telcos will mean the end of the ‘free’ ride that over-the-top (OTT) players have been enjoying for the last few years.

This has already produced casualties. Netflix, for instance, the shining star of the new content world, had to radically change its business model. Google’s YouTube and ‘catch up’ TV was causing unsustainable bottlenecks for telcos. Something had to give.

As flat rate declines, however, new opportunities arise. Fuelled by the network neutrality debate, telcos and OTT players have looked upon each other as enemies and reached for their legal arsenals to try and win the battle. The truth is that telcos and OTT have a natural and intuitive synergy. This is based, not on operating outside comfort zones, but sticking to core business. Telcos are great at bundling, billing, network management, and getting better and better at customer service, helped by the rise of analytics and policy management. OTT players are great at producing many forms of compelling content, games, music, movies, and more.