On June 27, 2108, the Department of Justice’s Antitrust Division announced that The Walt Disney Company (“Disney”) agreed to divest 22 regional sports networks (“RSNs”) to resolve antitrust concerns with its approximately $71 billion acquisition of certain assets from Twenty First Century Fox (“21CF”).
Speedy Antitrust Approval
DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues. Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests. The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.
Disney was in a hurry to obtain antitrust approval because it is involved in bidding war with Comcast for the 21CF assets. Indeed, Disney upped its offer on June 20th because Comcast had started a bidding war for the 21CF assets on June 13th. Comcast has its own antitrust issues with its acquisition, but it was hoping to be on a level playing field with Disney in terms of the antitrust reviews at the DOJ. Indeed, Comcast said as much when it made its bid as it indicated that it had already provided documents and information to the DOJ in response to its civil investigative demand regarding the acquisition of 21CF assets.
Comcast was banking on the DOJ conducting a long drawn out second request investigation for Disney’s deal. But, rather than conducting a lengthy review of the Disney/21CF deal, the DOJ entered into a quick settlement agreement. This was surprising because the Disney/21CF deal raised a number of horizontal and vertical issues including increasing the size of its motion picture business, content library and cable programming, which would increase its bargaining leverage in negotiations with movie theatres and TV programmers on licensing fees, Multichannel programing distributors (MVPDs) and virtual MVPDs over affiliate fees for its channels, and video streaming services over licensing fees. Moreover, Disney is taking control of Hulu and launching a number of subscription streaming businesses with the intent on foreclosing its content from rivals such as Netflix. It could be that none of these issues amount to actual antitrust problems, but certainly they warrant some investigation.
Despite all of these other issues, the DOJ quickly focused on the overlap in cable sports programming. The DOJ said in its Press Release that “to streamline agency clearance, Disney agreed to divest the 22 RSNs rather than continue with the Antitrust Division’s ongoing merger investigation.” Anyone who has visited Disney World knows the value of fast passes. Disney understands the value of time so it used a cooperative approach to get the greenlight for what appears to be the largest divestiture in history without an upfront buyer in record time.
Understanding that the DOJ’s major concern was the overlap in cable sports programming, Disney decided not to challenge that contention or negotiate a lesser divestiture, which would have lengthened the second request investigation many more months. Disney likely could have argued that ESPN channels and local RSNs really do not compete head to head at all. ESPN has market power as do the local RSNs to obtain increases in affiliate fees already. Moreover, watching ESPN is no substitute for watching your home town team on the local RSN. Disney, however, gave up on those arguments and agreed to a hefty structural remedy that took the issue off the table.
Makan Delrahim’s Editorial in the Washington Times Defending DOJ’s Fast Review
On July 12, 2018, Makan Delrahim wrote an editorial defending the speed in which Disney was able to negotiate a divestiture with the DOJ. He noted that the divestiture agreement was a “victory for American consumers and should be heralded as an example of merger parties working effectively with Division investigators to resolve antitrust concerns.” Delrahim noted that “each merger poses unique facts requiring unique market analysis.” He correctly stated that the pace of any review is largely in the hands of the merging parties, who control the timing of their Hart-Scott-Rodino (“HSR”) filings, as well as the pace and timing of compliance with the Division’s information requests.” He added that “parties can accelerate the review by pointing the Division to relevant information early in the investigation, promptly scheduling interviews, and remaining open to timely divestitures that resolve antitrust concerns.”
The DOJ alleged that without the divestiture the acquisition would likely result in higher prices for cable sports programming licensed to MVPDs in each of the local markets that the RSNs serve. As the DOJ explained, Disney (ESPN properties) and 21CF’s (RSNs) cable sports programming competed head to head. The DOJ alleged that the ESPN properties and the 21CF’s RSNs compete to sell cable sports programming to MVPDs in various local markets across the United States. Because of this competition, the complaint alleges that the proposed acquisition would likely result in MVPDs paying higher prices for cable sports programming in those local markets.
No Allegation of “Must Have” Programming
Interestingly, the DOJ did not allege that Disney or 21CF had “must have” programming. Arguably, ESPN channels and RSNs would be considered “must have” programming for MVPDs and VMVPDs. It could be that given Judge Leon’s Opinion in AT&T/Time Warner that the DOJ has given up on being able to prove that certain programming is “must have”.
No Upfront Buyer
Another interesting point is that the DOJ did not require an upfront buyer. There could be good reasons for why no upfront buyer was necessary. Upfront buyers are usually required when the DOJ is not sure that any appropriate buyers exist or if all of the assets need to be divested to one buyer. Here, there are numerous buyers and the DOJ decided that the RSNs can be sold to multiple buyers not to a single buyer. In that scenario, Comcast could be a buyer for some RSNs located in geographic areas where it is not the incumbent cable provider; AT&T and Charter have very little in the RSN space and may want to buy other properties to gain a larger footprint; Discovery has international sports rights so they may be interested in some RSNs; Liberty Media has owned RSNs in the past; Youtube, Facebook, and Amazon may want to dip their toes into the RSN space; and Sinclair, which has a strong local presence in many markets and currently owns the Tennis Channel could be interested in some of the RSNs.
The DOJ’s quick settlement demonstrates that the DOJ is willing to streamline investigations if merging parties propose substantial structural fixes upfront. The settlement and Mr. Delrahim’s editorial reminds merging parties that they control the timing and length of merger investigations. Merging parties control how fast they file their HSR submissions and when they comply with the DOJ’s second requests. Some merging parties take their time to comply, hold back submission of documents and information and delay offering any real significant divestitures until exhausting all of their economic arguments. While the government gets a lot of blame for long antitrust reviews, merging parties are always in control of the timing. This settlement agreement also demonstrates that the DOJ is willing to work with merging parties that are willing to cooperate in negotiating a complete solution to a competition concern. Consistent with its recent enforcement action in Bayer/Monsanto, the DOJ is willing to approve deals with significant divestitures. Here, the divestitures are worth approximately $20-23 billion—more than double the size of the Bayer divestiture. Finally, the settlement shows that the DOJ is willing to approve settlements without upfront buyers in situations where multiple buyers can acquire the divested assets, a single buyer is not necessary, and a number of potential buyers exist.