On November 3, 2014, the Department of Justice’s Antitrust Division challenged National CineMedia, Inc.’s (“NCM”) proposed acquisition of Screenvision by filing a lawsuit in federal court. The transaction would have combined the only two significant cinema advertising networks in the United States.
On May 5, 2014, NCM, Inc. entered into the Merger Agreement to acquire Screenvision for $375 million. NCM, Inc. is the managing member and owner of 45.8% of National CineMedia, LLC (“NCM”), the operator of the largest in-theatre digital media network in North America. Following the merger, NCM, Inc. was to evaluate whether to contribute the Screenvision assets to NCM LLC. Technically, it is not America’s largest cinema advertiser buying the industry’s second largest, but the largest member in the largest cinema advertiser making the purchase. It is a distinction without a difference because the bottom line is the deal would have combined the only two significant cinema advertising networks.
According to the DOJ, cinema advertising networks are intermediaries between movie theaters and advertisers. The networks create “pre-shows” – 20 to 30 minute long programs combining advertisements with special content – which movie theaters play prior to the start of each movie (pre-show services to movie theatres). The cinema advertising networks and movie theaters share the advertising revenue based on the specific financial terms of each theater’s contract. NCM and Screenvision provide financial incentives to movie theatres through long-term exclusive contracts. The networks then sell advertising of 15, 30, 60 and 90 second spots to local and national advertisers.
In June of 2014, NCM and Screenvision each received a request for additional information from the DOJ in connection with the DOJ’s review of the merger. After a four month investigation, the DOJ decided to block the deal.
Why Did the DOJ Block the Deal?
According to the DOJ, the two firms compete in pre-show services and cinema advertising. On the face of it, the transaction would have allowed only one company to control approximately 88% of the pre-show services and advertising placement in movie theatres located throughout the United States so the transaction would have eliminated competition that benefitted movie theatres and advertisers.
Through contracts with movie theatres, NCM and Screenvision have each established a nationwide network of movie screens. NCM’s cinema advertising network covers about 20,000 of the approximately 39,000 screens in the United States, including screens in 49 of the top 50 designated market areas (“DMAs”); Screenvision’s cinema advertising network covers about 14,300 screens, including screens in all 50 states, each of the top 50 DMAs, and 94% of all DMAs. DMAs are geographic areas of the United States ranked by population size. National advertisers are typically interested in reaching the top DMAs, which are the most populous areas of the country. In the United States, there is not even a significant number three player as Spotlight Cinema Networks, mentioned in the DOJ’s complaint, is a much smaller niche player with 700 screens.
According to the DOJ’s complaint, over the past couple of years, Screenvision became a very aggressive competitor. The Antitrust Division alleges that Screenvision successfully stole business from NCM by reducing the prices it charged advertisers and offered movie theaters a variety of attractive financial incentives. The complaint included the following statements from NCM’s and Screenvision’s executives describing the competition between the two companies:
- Screenvision’s head of advertising sales instructed his staff: “We will not lose [to NCM] on price. . . . You must do whatever we need to do and win these head to head battles.”
- NCM viewed Screenvision’s “new strategy of undercutting [NCM’s] pricing by 50 percent (or more) [as] a direct threat to [NCM’s] business model” and “a very unusual strategy in a duopoly.”
- NCM’s CEO resisted a wholesale change in NCM’s pricing policy, declaring in late 2013 that Screenvision’s pricing strategy was commoditizing cinema advertising and refusing to follow Screenvision “down the pricing death spiral!!!!!!!!!!!!”
The complaint also contains statements indicating NCM’s motivation to end that competition by entering into the transaction:
- “we need to buy [Screenvision] before either us or [Screenvision] does a stupid deal.”
- By April 2014, NCM arrived at what it called a “Strategy Decision Crossroads.” NCM told its board it could either acquire Screenvision, which would give NCM the ability to “Control Selling Tactics,” including “Pricing,” or it could compete through more aggressive pricing and adding theaters to its network.
The key to DOJ’s complaint is that NCM and Screenviosn compete to steal share from one another when these multi-year contracts come up for renewal or are renegotiated. According to Screenvision’s internal bid tracking reports, Screenvision faced NCM on almost all of its contested bidding opportunities (measured by screens) over the past three years. By contrast, Screenvision faced Spotlight – the niche firm that caters to art-house and luxury theaters – on only a small fraction of bids. Thus, movie theatres play NCM off against Screenvision in these negotiations. Moreover, the DOJ alleged that NCM and Screenvision carefully monitor each other’s efforts to win contracts with movie theatres and when the other’s contracts are expiring.
The DOJ’s complaint also explains that the proposed merger has already resulted in anticompetitive harm for certain NCM movie theatre customers. Before the decision to merge with NCM, Screenvision was ready to compete for NCM’s current movie theatres, whose contracts are set to expire. But after the deal announcement, Screenvision stopped competing. The DOJ alleges that Screenvision’s head of exhibitor relations testified, “[I]f we had not announced a merger six months ago, I would know exactly what’s expiring when, but I’ve kind of not pursued those circuits, because I don’ t think they would think about signing a deal with Screenvision – moving from NCM to sign a deal with Screenvision when they may be – we may be one company by that time.”
The DOJ further alleges that NCM and Screenvision offered to freeze existing contract rates for an additional five years, which deprives movie theatres of the benefits of head-to-head competition that likely would have occurred if not for the proposed merger. The DOJ further alleged that NCM made one key change, eliminating “minimum patron guarantee” escalation clauses that had served to protect movie theatre revenues. These clauses had been offered when NCM and Screenvision were competing aggressively against each other, but, because NCM believed that it would soon have a monopoly, NCM determined it no longer needed to offer them.
The DOJ complaint notes that when asked whether Screenvision had ever previously offered such a blanket contract extension, Screenvision’s CEO replied: “No, we haven’t.” He explained, “Well, we actually never in the past ever expected we would get any positive response from sending out these notices.” Clearly, movie theatres would have sought to improve contract terms but faced with the prospects of dealing with a monopolist, they accepted a renewal of existing rates. Given the evidence that the DOJ obtained through its investigation about past competition and the parties’ decision not to compete during the antitrust investigation, it is not a surprise that the DOJ chose to block the transaction.
Faced with the DOJ’s complaint, we can only assume what the parties may have argued in support of their merger. DOJ’s complaint states that NCM claims that the merger would enable the combined firm to offer ubiquitous coverage. However, the DOJ claims that advertisers already can obtain ubiquitous coverage as they purchase cinema advertisements across both NCM and Screenvision already. NCM also claims that the merger would enable them to target advertisements more effectively. The parties likely made the argument that cinema advertising is not a relevant market. If a combined NCM/Screenvision tries to increase the price for a 30-60-90 second spot, national advertisers can simply go to other forms of media such as television, radio, print, and internet. Some data shows that cinema advertising accounts for less than one percent of total ad spend in the United States. The parties likely argued that cinema advertising is not just small but it is shrinking. They probably provided data and statistics demonstrating that cinema audience numbers are declining and that the industry is hurting. The parties may have also argued that this is a small transaction nothing like an AT&T/T-Mobile deal or a Comcast/Time Warner deal that impacts million of consumers. The DOJ’s complaint states that NCM’s efficiencies claims amount to a bald assertion that bigger is somehow better for both advertisers and movie theatres even though the merger would leave them with only one supplier of cinema advertising and preshow services.
The Antitrust Division’s challenge is noteworthy for several reasons. First, the complaint to block this transaction demonstrates the Antitrust Division’s resolve to prevent anticompetitive mergers that would likely allow the merging parties to raise prices to consumers (i.e., movie theatres and advertisers). Second, the challenge reiterates that internal company documents are an essential part of every merger investigation. Hot docs can influence the DOJ’s investigation and its decision to challenge a transaction. Corporate executives should be aware that careless and inappropriate language in company documents can have an extremely negative effect. Ambiguity or exaggeration in memoranda, marketing presentations, or board presentations may convey the erroneous impression that the acquisition will injure competition. All internal company documents should be written clearly and carefully in order to avoid misinterpretation. Documents that contain careless language may make a perfectly legal merger appear anticompetitive. Here, in addition to hot docs, there also appears to be some hot testimony provided in depositions of company executives. The documents and testimony suggest that the motivation of the transaction is to consolidate pre-show advertising agencies from two to one in order to end healthy competition. Fourth, the allegations suggest that the merging parties may have also violated the antitrust laws and the HSR Act in terms of pre-merger coordination. Company executives testified that the companies engaged in certain actions during the investigation that led to immediate customer harm. It appears that the Antitrust Division obtained hot documents and hot testimony from the parties that confirmed the companies stopped competing with each other after the announcement of the merger. Obviously, this type of conduct is clearly anticompetitive because until the transaction closes, each company should still be aggressively competing against each other. Fifth, the challenge indicates that the DOJ is serious about enforcing the antitrust laws even against relatively mergers that impact a small subset of customers.