There are lots of reasons for investors to like The Walt Disney Company's (NYSE:DIS) proposed acquisition of Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA) in a deal valued at $52.4 billion. Marvel would gain control of a host of characters including the X-Men, The Fantastic Four, and Deadpool. Disney's stake in streaming platform Hulu would double, giving it a controlling interest in the company, and Disney would acquire a ton of new intellectual property that would augment the company's own ability to further its ambitions in the streaming space.
A potential stumbling block for the marriage made in Hollywood is the path to regulatory approval, which is by no means certain. Several similar mergers have faced intense scrutiny, and a review of deals of a similar magnitude may shed light on the potential for opposition from government antitrust regulators.
A similar deal faces opposition
AT&T Inc. (NYSE:T) revealed late last year that it planned to acquire Time Warner Inc. (NYSE:TWX), but that deal suffered a setback when the Department of Justice (DOJ) filed a lawsuit to block the merger. The DOJ argued that the combined company would have too much power to charge higher prices to competitors for its programming. Turner's networks include three of the top five cable channels and a top-tier news station, which combine to reach 91 million of the 100 million U.S. pay-TV households. As the owner of DirecTV, AT&T has 25 million of those customers, making it the largest provider in the country.
The Justice Department is using AT&T's own words to oppose the merger. According to the DOJ filing:
AT&T itself has expressly acknowledged, distributors with control over popular programming "have the incentive and ability to use ... that control as a weapon to hinder competition." And, as DirecTV itself has explained, such vertically integrated programmers "can much more credibly threaten to withhold programming from rival [distributors]" and can "use such threats to demand higher prices and more favorable terms.
Previous deals faced intense scrutiny
The megamerger that joined Comcast Corporation (NASDAQ:CMCSA) with NBC Universal began in 2009 as a joint venture between General Electric Company and the cable giant. In order for the deal to proceed, the Federal Communications Commission (FCC) and the DOJ conducted a year-long review and imposed a wide array of restrictions on the union.
As conditions of the settlement, Comcast was prohibited from withholding programming from both streaming companies and its cable competitors. The company also agreed to keep NBC as a free, over-the-air television network. At the time, the head of the DOJ Antitrust division said, "The settlement ensures the transaction will not chill the nascent competition posed by online competitors," referring to streaming services like Netflix and Hulu, which is jointly owned -- with 30% controlled by NBC Universal, 30% by Disney, 30% by Fox, and 10% by Time Warner.
A previous deal revisited
The Comcast NBC Universal deal is still facing regulatory scrutiny a full seven years after it closed. Earlier this month, a senator asked the DOJ to review the Comcast NBC Universal transaction to determine whether consumers will be at risk when the conditions required for approval of the merger expire in September 2018. The company was prohibited from withholding its content from online, cable, and satellite competitors, but several complaints have been filed with regulators. It was also subject to anti-retaliation provisions that are monitored by the FCC. The senator also pointed out that the reversal of net neutrality could result in changes to the way "internet providers treat their competitors," especially "online video distributors."
An uphill battle?
Disney's acquisition of 22 regional sports networks from Fox will be enough by itself to invite additional scrutiny by regulators. Disney already controls much of the sports market with its ownership of ESPN. In addition, the combination of the Fox and Disney movie studios would have controlled nearly 40% of the market based on last year's movie slate. This may be simply too much for antitrust regulators to ignore. Disney has already come under fire this year for requiring 65% of the ticket revenue from theaters for Star Wars: The Last Jedi. Acquiring the Fox studios would give the House of Mouse even more pricing power.
Disney may face a formidable task in its pursuit of Fox, and even if a deal is approved, the company that emerges may be far different than the one proposed today. The regulatory environment has been casting a leery eye at these megamergers, and Disney likely has its work cut out for it trying to get this acquisition approved.