TheChek News Flow

: TWX/T – OG Risk Arb is reducing its probability of deal close to 75% because of the revelations in the press after our note yesterday which substantially increase the probability of this matter going to trial. The public feud between the DOJ and T in the press substantially decreases the probability of a consent decree before trial but a deal is still possible and of course the parties can settle after litigation starts. Such a deal could still include behavioral remedies (despite the DOJ preference not to use them) and now it is more likely such a consent agreement could include structural remedies.  

Given the importance of this deal to T and the fact that litigation is always risky, one would hope T would rationally realize the best way forward is settlement not litigation and T should take a less aggressive approach to dealing with the DOJ.  As going to litigation would also be risky for the DOJ, the DOJ should remain open to settlement despite the war or words in the press. As there probably is some type of tolling agreement in place which prevents T from closing before a defined date or after a certain notice period, T and the DOJ probably still have some time to try resolve things on a friendly basis before the DOJ is forced to sue to block deal at the end of the tolling agreement if no agreement is reached (of course T could extend this period again to allow for negotiation if it made sense to do so). If litigation is commenced, the DOJ complaint is NOT likely to focus only on CNN as the basis of its concern as that would appear political and be a weaker litigation position but rather on all of (or much of) the attractive content that T (or effectively DirecTV) is acquiring by buying TWX.  

The DOJ theory is likely to look something like that put forth in the US vs. Comcast/GE/NBC complaint filed in 2011 as part of the consent decree entered there. (See https://www.justice.gov/atr/case-document/complaint-68). We believe the theory is likely to be some version of DirecTV will use its control of desirable content to disadvantage its rivals especially DISH by limiting rivals access to that content. Despite the stories stating some legal experts believe T is very likely to win such litigation many of which are predicated on the erroneous assumption that the complaint (if one is filed) likely will only focus on CNN, we believe this will be a much closer case and given the advantages the government has in trial in DC district court we would initially give slight odds to the government winning. Of course, both sides will have eminent economists that will say opposite things and therefore largely cancel each other out. If litigation commences it is likely to be in late November or December and then trial likely in February/March and a decision in April/May – potentially on top of the deal’s 4/22/2018 termination date. Until litigation is commenced, OG Risk Arb will leave our closing guidance as 12/31/2017.

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