Future Political Uncertainties Paint Murky Merger Picture

Big media deals and strict regulation don't mix well. But will the fear of potential change in control of the White House in 2008 spur mergers and acquisitions before then?

That's the question some Washington watchers and bankers are considering as they look beyond this fall's congressional elections to the next presidential contest.

"The regulatory environment is probably as favorable for deals as it is ever going to get — so companies that are considering deals have to be factoring that in right now," said Paul Gallant, media analyst at Stanford Washington Research Group.

Gallant expects that any prospective major media deals will be proposed in the next six to eight months in case the White House is won back by the Democrats. The Democrats are seen by some as more unfriendly to consolidation.

Republicans, who control Congress as well as the White House under George W. Bush, have historically been viewed as pro-business, creating favorable tax rules and allowing markets rather than regulators to hash out most competitive issues.

Consolidation in the media sector provokes particularly contentious debate, as consumer groups worry that allowing companies to concentrate media properties squeezes out independent voices and reduces local control.

"A Democratic administration could decide that consolidation in some sectors has gone far enough and that consumer welfare could be at risk," said Gallant.

Ownership laws prohibit a company from owning both a newspaper and a TV or radio station in the same city, and constrain the number of TV and radio stations a business can own.

Meanwhile, dual network rules effectively forbid a merger among the top four broadcast networks — Walt Disney Co.'s (DIS) ABC, CBS Corp. (CBS) General Electric Co.'s (GE) NBC and News Corp.'s (NWS) Fox — says Gallant. (News Corp. is the parent company of FOX News, which operates FOXNews.com.)

The Federal Communications Commission, which had its efforts to relax ownership laws put on hold by a court in 2003, recently began reexamining possible changes in the regulations. Gallant expects this to take 12 to 15 months to complete and expects some relaxation of certain rules.

However, Democrats may offer a contrasting view.

Back in 1997, then-FCC chief Reed Hundt, appointed by Democrat President Bill Clinton, deemed a combination of long-distance telephone company AT&T Corp. (T) and local phone company SBC Communications Inc. "unthinkable."

But in November 2005, under Republican FCC Chairman Kevin Martin, who was appointed by Bush, SBC closed its purchase of AT&T Corp. AT&T subsequently changed its name to AT&T Inc. and in March 2006 struck a $67 billion deal to buy BellSouth Corp.


Regulation remains a hot topic. A U.S. judge Wednesday expressed doubts about federal settlements last year permitting two major telecoms acquisitions — SBC buying AT&T, as well as Verizon Communications (VZ) purchasing MCI Inc. — in a case that could affect how carefully future mergers are reviewed by the government.

Meanwhile, the FCC Thursday gave conditional permission for the sale of bankrupt Adelphia Communications Corp. to rival cable operators Comcast Corp. and Time Warner Inc. (TWX).

While today's regulatory environment may be more deal-friendly than in the past, investment bankers aren't foreseeing a scramble for deals ahead of the election.

"There's no question that the regulatory environment has been friendly to business combinations," said Dennis Hersch, JP Morgan's (JPM) Global Chairman of Mergers and Acquisitions.

"But I think it would take a major, major shift in the composition of Congress to cause someone to be concerned that the political landscape had changed in way that would make deal completion more difficult," he said.

"I haven't picked up any indication that anyone is going to run to do deals because people are afraid that Democrats are going to change the way the system has been," Hersch said. "The numbers would have to change rather dramatically."

One potential deal that arguably has incentive to be pushed through under the current administration is a combination of satellite television operator DirecTV Group Inc., controlled by Rupert Murdoch's News Corp., and rival EchoStar Communications Corp.

"I think if there's any prospect for that deal at all ... it almost certainly has to be in a Republican administration," said Craig Moffett, a media analyst at Sanford C. Bernstein & Co. He said that would probably mean it would have to be put in front of regulators before Thanksgiving 2007.

The two companies tried to merge in 2002, but the deal collapsed under the weight of opposition from the FCC, which believed the combination of the top two satellite companies would stifle competition.

In March, DirecTV said it was still interested in buying smaller rival EchoStar, but doubted U.S. regulators would allow such an acquisition.

Some analysts point out that, regulation aside, now just isn't an easy time to do media deals.

"I think we're in a period where buyers and sellers are not in agreement on value of what the media companies are worth," said Mike Kupinski, analyst at A.G. Edwards. "There's a lot of uncertainty regarding the business environment."