Judge Richard Leon of the U.S. District Court for the District of Columbia oversaw a six-week trial where the government argued the deal was illegal because it would give AT&T the power to withhold HBO and Turner channels from DirecTV’s smaller pay TV rivals and cheaper online competitors.
The Justice Department focused on Time Warner’s Turner assets, saying cable networks needed Turner channels like CNN and live sports to survive.
AT&T said it would not withhold shows because the licensing revenue from Time Warner was too valuable to pass up. It offered an arbitration agreement to small pay TV companies and promised not to black out Turner channels if conflicts arose over pricing Turner content for seven years.
UBS said in a June 6 research note that Time Warner’s share price shows about a 50 percent probability of the deal closing.
Neither the Justice Department nor AT&T will say if they would appeal a loss in court.
Here are some of the scenarios for a ruling on June 12:
DEAL APPROVED, NO CONDITIONS
This is obviously the outcome that AT&T seeks, and would allow it to add content sales to its revenue stream, which now depends on wireless sales in a maturing market, landlines and the shrinking pay TV market.
“AT&T clearly is looking for a diversification strategy from a revenue perspective. DirecTV is under strain. This (deal) was a hedge against content costs,” said Mike McCormack, a senior analyst for telecom services at Guggenheim.
This ruling would embolden other pay TV companies or internet platforms -- like Comcast or Google -- to buy content.
Comcast said in May it was preparing an all-cash offer of more than $50 billion for most of Fox’s media assets, competing with a Disney offer. Sources say it will only go forward if the judge allows the AT&T merger with Time Warner.
DEAL BLOCKED ALTOGETHER
If the deal is stopped, AT&T, in particular, would need a new strategy.
Time Warner is in a stronger position to go it alone, and has had a string of solid quarterly earnings reports with unique content like HBO’s “Game of Thrones,” CNN, and Turner Sports’ March Madness basketball.
In contrast, AT&T’s quarterly reports have been up and down over the past two years; with the ups attributed to stronger wireless subscriptions in some instances and the downs often blamed on lost DirecTV subscriptions.
That said, while AT&T has fought tooth and nail to save this deal, one industry analyst argued that losing Time Warner might be good for AT&T.
“I think AT&T would probably be better off if the deal fell through. The value it gets for it (Time Warner) doesn’t generate a sufficient return to justify the cost of the deal,” said Allan Nichols at Morningstar.
DEAL ALLOWED WITH DIVESTMENT OF DIRECTV OR TURNER
The companies may decide to appeal a ruling that requires AT&T to sell DirecTV, with 20 million subscribers, or orders Time Warner to sell Turner to get the deal done.
When the government suggested at trial that AT&T sell DirecTV as an alternative to stopping the deal entirely, Daniel Petrocelli, speaking for the companies, objected strongly, saying: “That is an effort to kill the deal.”
DEAL ALLOWED WITH NEW CONDITIONS, NOT DIVESTITURES
During the trial, Leon asked few questions but many of them focused on the adequacy of the arbitration proposal.
AT&T offered last year to submit pricing disputes with other pay TV companies over Turner’s CNN, sports and other channels to third-party arbitration. The companies offered not to black out programming during arbitration for seven years.
In a court filing, cable provider RCN and others urged the judge to include all Time Warner assets, especially HBO, in the offer and to allow broadcasters to learn what other distributors paid for content as part of the process.
Reporting by Diane Bartz and Carl O’Donnell; Editing by Phil Berlowitz
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