On July 12, just one month after the Justice Department’s antitrust lawsuit to block AT&T’s merger with Time Warner was rejected by U.S. District Court Judge Richard Leon, the Justice Department appealed the ruling.
What does this mean for dividend investors? After all, AT&T already merged with Time Warner on June 15. Let’s take a closer look to understand if this event is news or noise.
In his 172-page opinion issued in June, Judge Leon made it clear that the Department of Justice (DOJ) had failed to meet its burden of proof that the AT&T/Time Warner merger would harm consumers. He even warned that any appeal would be likely to fail, and strongly urged the DOJ to not attempt to block the merger via requesting a stay. At the time, the U.S. government didn’t and the merger closed two days later.
However, now the DOJ has reversed course and is appealing the decision to the DC Court of Appeals. There a three judge panel will take a look at whether the lower court made a major mistake in its fact finding. Theoretically, once this decision is made, either AT&T or the DOJ (depending on who loses) could make its way all the way to the Supreme Court, which would then hear the first merger related case since the 1970’s.
However, the consensus among both analysts and legal scholars is that the DOJ’s appeal has a very weak chance of success. In fact, Judge Leon’s opinion even outlined his warning to the DOJ about avoiding the potentially time consuming and expensive appeals process.
“As my 170-plus page opinion makes clear — I do not believe that the Government has a likelihood of success on the merits of an appeal.”
This is because the DC Court of Appeals isn’t likely to overturn the case unless it finds that Judge Leon made a gross error in the facts of the case. In the world of jurisprudence, this is very rare, as previous court decisions are given wide difference and usually upheld.
This is why AT&T’s General Counsel David McAtee’s responded to the appeal by stating:
“The Court’s decision could hardly have been more thorough, fact-based, and well-reasoned. While the losing party in litigation always has the right to appeal if it wishes, we are surprised that the DOJ has chosen to do so under these circumstances.”
Meanwhile, AT&T CEO Randall Stephenson stated that while AT&T had been prepared for this potential scenario (that’s why the firm boxed off Time Warner Media as a standalone subsidiary), he said “he wasn’t worried about it”.
In fact, Stephenson later clarified to CNBC that, “We think the likelihood of this thing being reversed and overturned is really remote. It’s a very narrow path that would have to be traveled to get this thing reversed in any way. The merger is closed. We own Time Warner.”
Credit rating agencies Fitch and Moody’s have both weighed in saying they expect the appeal to fail, and thus won’t change their outlook on AT&T’s debt. However, as AT&T’s CEO explained, there may be ongoing uncertainty around this for five to six months (how long such appeals usually last), which might weigh on AT&T’s share price during that time.
Thus, the most likely outcome of the appeals process is that the original ruling allowing the merger is upheld, not changing anything. To learn more about what the merger means for AT&T’s dividend and long-term strategy, please see our previous note.