Time Warner’s purchase by AT&T is approved with restrictions

The Administrative Council for Economic Defense – CADE approved with restrictions the acquisition of Time Warner by AT&T, during the judgment session of 18 October. The approval of the transaction was conditioned to the signature of a Merger Control Agreement (ACC in its acronym in Portuguese), which foresees the compliance with commitments which would eliminate the risks of discrimination and exclusion of competitors in the markets of television programming and pay-tv operations (Merger No. 08700.001390/2017-14).

In Brazil, the merger will basically result in a vertical relationship between the activities of channel licensing to pay-tv operators (programming), by Time Warner Group, on one side, and the pay-tv services via satellite provided by the operator Sky Brasil (packing and distribution), a controlled company of AT&T Group, on the other side.

According to the Reporting Commissioner, Gilvandro Araújo, Time   Warner has a high market power in the activities of content programming and channel licensing in Brazil. The national market of pay-tv operation, for its turn, represents practically a duopoly, with Sky and its competitor, Telecom Americas, concentrating nearly 80% of the market share.

In his vote, the Reporting Commissioner pointed out that the companies’ vertical integration, considering that they already have a high market share, could result in the alignment of interests that would harm competitors in both segments. This would be possible by the exchange of sensitive information and the negotiation of more favorable conditions, among other advantages.

In this context, one of the concerns raised by the merger proposal were the incentives and the capacity that Sky would have to discriminate other programmers competing with Time Warner. Furthermore, there is a possibility of closure of the pay-tv operations market through the targeting of Time Warner’s content to Sky, resulting in damage to the other agents of this segment.

Remedies

To solve the competition issues identified, the companies signed a Merger Control Agreement with CADE. By means of the ACC, they have committed to comply with several obligations imposed by the antitrust authority. The agreement will be valid for five years from the publication of its approval in the Federal Official Gazette.

Among the commitments assumed by AT&T, it is the maintenance of Sky Brasil and Time Warner’s programming channels as independent companies with their own governance and administration structures. They must prevent from exchanging sensitive competition information or information that could discriminate the agents that do not belong to the same economic group of the companies involved in the merger operation.

“The separation prevents the behavior alignment in the market. That means that the two companies will remain acting as autonomous agents”, explained the Reporting Commissioner.

The AT&T also committed to offering Time Warner’s programming channels to non-affiliated packers and providers of pay-tv with all the programming channels licensed to Sky, upon non-discriminatory conditions. The company should also formalize the current licensing agreements.

In the licensing of programming channels for pay-tv distribution, Sky Brasil will not be allowed to refuse broadcasting or to impose terms to broadcasting that could be considered discriminatory to the providers of programming channels not affiliated to AT&T, compared to those applicable to the Time Warner’s channel programmers. In order to comply with this condition, the adjustment of the currently valid contracts was also determined.

Mr. Gilvandro Araújo pointed out that: “For both of these points of the ACC, it is important to clarify that the provision of non-isonomic commercial clauses between the parties and the other hiring companies can be admitted, as long as economic rationality based on objective factors can be verified”,

It was also established the appointment of an independent consultant, responsible for monitoring the compliance with the obligations assumed by the ACC’s signatories and reporting possible noncompliance to CADE. The parties are also required to inform to the authority about any investigation request or complaint in the sector, as well as possible complaints about discriminatory behavior.

Arbitration

The operation was notified in other 18 jurisdictions, in addition to Brazil. Among them, the transaction was approved conditioned to remedies only in Mexico and Chile. These two countries adopted the arbitration mechanism to solve conflicts related to the commercial conditions of hiring services, a provision also established in the ACC homologated by CADE’s Tribunal.

It was established that the arbitration mechanism could be used in case of refusal from the signatories to negotiate appropriate commercial conditions to the non-integrated economic agents.

Commissioner Araujo stated that: “The arbitration costs will be financed by AT&T, in the situations that the agent has less than 20% of market share. It not only stimulates the company to comply with the ACC but also hinders that high costs inhibit the competitors to denounce hiring obstacles, which reinforces the remedy effectiveness”. The only events in which AT&T will not be responsible for the costs is those in which the arbitration process was founded on misleading information and/or due to the dishonesty of competitors.