Wall Street Journal

AT&T’s deal to buy Time Warner sails toward two cresting waves of opposition: resurgent antitrust enforcement in Washington and politicians fired by a new bipartisan populist rage.

It is too early to know how regulators will treat the AT&T-Time Warner deal. But after several quiet years, President Barack Obama’s antitrust team has switched into high gear in response to a recent spurt of deal-making. This trend is likely to continue in the next administration, as both presidential campaigns have signaled unease with the AT&T deal and with economic consolidation more broadly. Justice Department antitrust enforcers say they have sunk eight would-be deals over the past year and are currently waging court fights over three more, including two big health-insurance mergers. In all, the Justice Department has stopped 43 deals over the past eight years, more than double the mergers blocked by the preceding Bush Justice Department.

AT&T executives say their proposed $85.4 billion acquisition of Time Warner would deliver innovation to advertising.

While ad industry executives love hearing such talk, they say it is unclear exactly what it could mean for them. The combination of AT&T and Time Warner would bring together huge amounts of viewer data with content, which could serve as a catalyst to make TV advertising a lot more targeted to individuals, similar to the way digital advertising is now. In addition, AT&T’s data from its 90 million wireless subscribers and DirecTV households could be leveraged to target people with ads across devices, including TVs, laptops and mobile phones, some ad executives speculate.

AT&T is buying Time Warner to help it succeed in the future world of media consumption. In many ways, it already is living in that world, and it isn’t doing all that well. That alone is an important warning sign of the risk the telecom company is taking.

AT&T’s deal to buy Time Warner for $85.4 billion in cash and stock marks the wireless carrier’s second major bet in as many years on beefing up its exposure to the pay-TV ecosystem. With DirecTV, AT&T became the country’s largest pay-TV distributor. With Time Warner, it would become the owner of some of TV’s most popular networks and programming. Both target companies achieved their dominance in the world of traditional pay TV. AT&T, which is preparing to launch an Internet TV service, hopes to use those assets to be ready for a world where people predominantly watch video online and on their mobile devices. Still, there is no guarantee that future will be as lucrative as pay TV’s past, and that could erode the value of AT&T’s purchases. If that future is anything like the present for AT&T, it will be hard for the company to justify the price of the deal. AT&T has lost 200,000 video customers in the past year, despite the purchase of DirecTV last July. That could be a sign of things to come for Time Warner, as it tries to grow sales of its content to pay-TV providers. AT&T’s strategy is also far bolder than that of rival Verizon. The latter has chosen to tackle the wireless problem by pursuing a lower-risk strategy of growth through short-form video, funded by Internet advertising. That means a failure for Verizon would be less costly. To justify its purchase of Time Warner to investors, AT&T needs a Hollywood ending.

AT&T and Time Warner are suiting up for the Great Media Game. Their strategy to win is more about defense than offense. The strongest case for the gargantuan merger is that it is a hedge against a future where the first point of entry for a media consumer might be Netflix, Facebook, YouTube or Hulu, just as easily as a cable or telecom company. AT&T’s $50 billion acquisition of DirecTV tethered the telecom giant to a pay-TV business that has begun to decline and could be in store for serious pain if cord-cutting accelerates.

The good news for AT&T, Comcast, and others is that consumers will still need broadband subscriptions to sign up for their favorite streaming services. Now, with the Time Warner deal, there will be another hedge for AT&T: Any emerging streaming platform will need to license content from the big media conglomerates to survive. Time Warner won’t likely be left out of any aspiring “skinny” online TV bundle from Google, Amazon or Apple, or TV-like platform on social media, be it via Facebook, Snapchat or Twitter. (A side benefit: AT&T will take on Time Warner’s 10% ownership of Hulu alongside Comcast, Walt Disney and 21st Century Fox)

Faced with the same saturated wireless market, the nation’s two biggest telecom companies have placed divergent bets on the future. With its $85 billion agreement to buy Time Warner , AT&T has turned to television while Verizon has looked to Silicon Valley, with its $4.4 billion purchase of AOL in 2015 and pending $4.8 billion acquisition of Yahoo. Both operators are trying to solve the same riddle—each with a different piece of the ill-fated 2001 merger of AOL-Time Warner. They both have millions of wireless subscribers who pay monthly fees to use their networks to share photos, watch videos and tap into social networks. But that wireless business alone lacks the means to drive growth now that the majority of Americans have a smartphone. At the same time, their two smaller rivals are chipping away at their subscriber base.

Two months ago, AT&T Chief Executive Randall Stephenson stopped by Time Warner Chief Executive Jeff Bewkes’s offices in New York for a lunch of salmon, while musing about the increasing convergence of the media and telecommunications industries. During their lunch, Stephenson surprised Bewkes by suggesting that AT&T buy Time Warner, apparently. Bewkes said it wasn’t for sale, but at the right price he would consider an offer, apparently, signaling that a deal was possible.

Stephenson walked away with his mind swirling with the possibilities that Time Warner’s premium content—top brands such as HBO, CNN and Warner Bros.—could bring to the streaming video service he was trying to build. “If you were ever going to do something like this, this is the content you’d like to use as an anchor tenant,” he said. From that point forward, things proceeded at breakneck speed, culminating in the biggest deal of the year as AT&T announced it was buying Time Warner for $107.50 a share—a 36% premium to where its stock was trading before the news of a deal started to trickle out during the week of Oct 17.

The Federal Communications Commission’s 2015 power grab over the Internet is premised on the need for government to allocate broadband scarcity. So much for that. AT&T’s $85.4 billion weekend bid to buy Time Warner is the latest bet, and a very big one, that technology is making wireless broadband ubiquitous despite regulatory obstacles. The real threat to this new era of competition is the President Barack Obama-era FCC.

FCC Chairman Tom Wheeler justified his application of horse-and-buggy Title II regulation on grounds that government needed to drive broadband distribution. Bureaucracies rarely admit mistakes, so the Wheeler FCC might block the AT&T-Time Warner merger merely to prevent a market demonstration that the agency’s regulatory intervention is unnecessary. Yes, bureaucratic actors really can be that self-interested. One business issue worth mentioning is AT&T’s rising debt load to execute the purchase. The company says it has a $40 billion bridge loan commitment over 18 months to finance the cash portion of its half-stock, half-cash offer for Time Warner. But AT&T already has more than $120 billion in debt from its previous acquisitions, and its Standard & Poor’s bond rating is BBB+, close to the edge of investment grade. A downgrade to junk status could raise the company’s borrowing costs considerably. AT&T CEO Randall Stephenson had better hope the combined company’s cash flow can work down that debt burden while the Federal Reserve keeps interest rates at historic lows. Stephenson is making a big play on the wireless future, and his legacy as CEO will depend on how it works out. In a better world, the Obama Administration would see all of this as evidence that Chairman Wheeler’s Internet gatekeeping is misguided and rewrite its Title II supervision. Alas, that will take an end to progressive rule in Washington.

Buying Time Warner will make AT&T among the most heavily indebted companies on earth. In a deal announced Oct 22, AT&T agreed to pay $85.4 billion to buy the owner of CNN, HBO and TNT networks. Including debt, the value grows to $108.7 billion. And to finance the half-cash, half-stock deal, AT&T is taking on $40 billion of bridge loans.

AT&T, the largest nonfinancial corporate issuer of dollar-denominated debt, already has about $119 billion in net debt—roughly double what it was five years ago. “This would put them, I think, within striking distance of the financials with respect to unsecured bond issuance,” says Mark Stodden, a credit analyst at Moody’s. Stodden estimates the carrier’s total debt load will grow to as much as $170 billion if the deal is approved. AT&T hasn’t said precisely how much debt it plans to issue to fund the transaction, but estimates that by the end of the first year after the deal’s close, net debt will be around 2.5 times its adjusted earnings, up from 2.24 times at the end of the third quarter. Most recently, AT&T added to its debt when it bought the satellite-television operator DirecTV in 2015. It also paid $18 billion for wireless airwaves licenses during a 2015 government auction and spent roughly $10 billion buying its own shares in 2014. More spending is on the horizon tooas the carrier is currently participating in a government auction of wireless airwaves.

AT&T’s blockbuster deal promises to reshape the media landscape—if the companies can navigate a series of obstacles, including possible opposition from US antitrust authorities and objections by lawmakers and media and telecom rivals.

Even before the deal was announced, members of Congress, industry groups and Republican presidential nominee Donald Trump began to question it, contending the combination of AT&T’s millions of wireless and pay-television subscribers with Time Warner’s stable of TV networks and programming would limit competition and hurt consumers. Trump said if elected he wouldn’t approve the deal “because it’s too much concentration of power in the hands of too few.” Sen Bernie Sanders (I-VT) called on the Administration to block the merger. Sen Tim Kaine (D-VA), the Democratic nominee for Vice President, said he shared the “concerns and questions” raised by Sen. Al Franken (D-MN) that the deal could lead to higher costs and fewer choices. “Pro-competition and less concentration, I think, is generally helpful, especially in the media.” The Justice Department and Federal Communications Commission both declined to comment.

Some of Republican presidential candidate Donald Trump’s posts on Facebook have set off an intense debate inside the social media company over the past year, with some employees arguing certain posts about banning Muslims from entering the US should be removed for violating the site’s rules on hate speech, apparently. The decision to allow Trump’s posts went all the way to Facebook Inc. Chief Executive Mark Zuckerberg, who ruled in December that it would be inappropriate to censor the candidate, apparently.

That decision has prompted employees across the company to complain on Facebook’s internal messaging service and in person to Zuckerberg and other managers that it was bending the site’s rules for Trump, and some employees who work in a group charged with reviewing content on Facebook threatened to quit, apparently. Trump’s campaign didn’t respond to requests for comment. In a statement, a Facebook spokeswoman said its reviewers consider the context of a post when assessing whether to take it down. “That context can include the value of political discourse,” she said. “Many people are voicing opinions about this particular content and it has become an important part of the conversation around who the next US president will be.” On Oct 21, senior members of Facebook’s policy team posted more details on its policy. “In the weeks ahead, we’re going to begin allowing more items that people find newsworthy, significant, or important to the public interest—even if they might otherwise violate our standards,” they wrote.