In this weekend update we explain why you can probably skip this one but you will definitely want to read next week’s.Both our marketing and data analytics department hated this opening line but we always go with honesty as being the best policy. And we know that not all weeks have the same significance. So really, particularly given the confluence of baseball playoffs, football, and the totally bizarre combination of greatest Elmore Leonard novel ever and a bizzaro version of Lawrence of Arabia engulfing DC, if you want to skip an update, skip this one On the C-Band front, a hearing Thursday, and the likely lead up, will provide the clearest public information about the points of view of Chairman Pai and an important critic, Senator Kennedy. On the TMUS/S/DISH litigation front, we will likely finally see the FCC order, providing our best view of the strength of the pro-deal arguments. On both fronts, we analyze news that emerge last week, including confirmation of the FCC coming together on at least 300 MHz, thoughts on the impact of individual state moves on the wireless merger, the ruling by the trial judge on Trump’s taxes, and some Tunney Act filings. We also provide quick thoughts on the continuing rumors on a DISH/DirecTV tie up and the “family” lunch between President Trump and Chairman Pai.
C-Band: Big Appropriations Subcommittee Hearing Ahead
Broad Outline for FCC Order Largely Confirmed, but Details Missing. This week brought further confirmation that the outline of the FCC’s decision on how to proceed with the C-Band reallocation were in line with what we have said before: a December decision, at least 300 MHz to be reallocated, and the sale likely to be run by the CBA. (See note from our New Street Colleague Vivek Stalam. LINK). But as we have noted before, that outline leaves many details unanswered. For example, while both Commissioners O’Rielly and Carr have now publicly said the final order has to reallocate at least 300 MHz, they are also not seen as favoring the only plans in the record that would reallocate that amount of spectrum.Both the ACA and T-Mobile plans would result in significantly more than 300 MHz being reallocated. Still, Commissioners O’Rielly and Carr (and we suspect Chairman Pai) are largely supportive of the CBA framework, despite CBA only offering a plan for reallocating 200 MHz. We understand that CBA is working on a plan to reallocate at least 300 but has yet to file it. Further, the CBA plan for how it intends to sell the spectrum (known as the FUEL Plan) has been widely panned by other stakeholders, yet CBA has yet to file a new plan for how it intends to sell the spectrum. Moreover, while news reports and our own impressions suggest that Chairman Pai and his staff are now in the process of finalizing the details of their policy cuts, there is still an open question of whether the decision will face head winds from either Congress or the Courts.
Hearing Featuring Kennedy, Pai and Budget Hawks. One of the principal Congressional antagonists to a CBA run auction is Senator Kennedy, who has publicly called for an FCC auction and has also advocated the proceeds largely going to the US Treasury. There has been considerable back and forth between Kennedy and Senators Thune and Wicker on jurisdictional questions that we have discussed before. (LINK) Those issues, however, are now in the background as Kennedy has scheduled a hearing Thursday at 10:00 a.m. of his Financial Services and General Government Subcommittee of the Appropriations Committee. The stated purpose of the hearing is to “conduct oversight of the Federal Communications Commission Spectrum Auctions Program” but we feel confident it will focus on the C-Band. There are just three scheduled witnesses: Chairman Pai; Mr. Tom Schatz, President, Citizens Against Government Waste; and Mr. David Williams, President, Taxpayers Protection Alliance. Mr. Schatz and Mr. Williams are likely to argue that the US Treasury should receive the lions’ share of the proceeds.
Will Pai Debate or Deflect? This hearing will be the most important opportunity for investors to gauge how strongly Senator Kennedy, and potentially other Senators, want to push Pai on the issues of who runs the sale process and who gets the money. Even more important for investors, it will be the most important opportunity to date to hear how Pai articulates his responses. To date, Pai has chosen to hold his cards close and in his public statements has said very little about his plans. In earlier Congressional hearings he has chosen not to articulate and debate policy but rather to deflect Congressional questions by saying that everything was on the table and all concerns were being fully considered.
We don’t think he was being disingenuous. We think he has been genuinely undecided on a number of key issues, and that the usual ideological or stakeholder framework that he has used to reach his decisions elsewhere do not provide easy answers here. Moreover, we think he is highly sensitive to congressionalIn this case, by congressional we mean from Republicans in the Congress. Pai has been largely indifferent to criticisms from Democrats. Senator Kennedy being from his own party creates a different kind of challenge for him, particularly because, again, the issues don’t cut in an easy conservative/liberal framework. The two witnesses with whom he will share the panel are generally seen as conservatives and will likely be attacking him from the right, putting him in a position different from he has faced in his tenure as Chair.and White House reactions, and therefore is in a bit of an information feedback loop with others, like Senator Kennedy, in terms of reaching his decision. We think he is likely to adopt a deflection strategy again, but as reports surface about decisions being made, and as we are now close to Pai’s own self-imposed deadline, such deflection becomes less credible. We think Pai will try to avoid debating Senator Kennedy but we think he is likely to be forced to be more forthcoming than he has been in the past and it could be that this becomes the moment where Pai publicly reveals his position on questions of interest to investors.
Hearing an Action Forcing Event As Other Stakeholders Try to Affect Hearing to Advance Agenda. Investors should also be aware that in the days prior to a hearing, various stakeholders seek to affect the hearing with public announcements designed to stimulate useful questions.Of course, privately the stakeholders are already flooding the relevant Senators with questions they would like Senators to ask.We would not be surprised, for example, to see CBA offer various statements that Pai would see as useful in crafting his answers, related to issues of how they intend to run a sales process and the nature of the “significant voluntary contribution” they intend to make to the US Treasury.We admit that we have been surprised by CBA’s silence on a number of issues, but we respect that they are in a much better position than we are to judge when the politically optimum moment would be to reveal their plans. In addition, as we noted last week, Chairman Pai has not put pressure on the CBA to do so, suggesting to us that the Chairman either does not know how to put pressure on CBA or does not care to do so. (LINK) Either one is a positive indicator for CBA.
Week Not Definitive But Represents the Beginning of the End of the Process. The combination of those stakeholder announcements, Kennedy’s questions and Pai’s answers, as well as comments from other Senators and witnesses, will almost certainly be the most important public information we will have yet seen to evaluate the likely FCC order in December and congressional reaction. We do not believe this week will be definitive; Pai is unlikely to lay out all the details nor will we know all the details of Senator Kennedy’s plans to convince the FCC to administer the auction and obtain more of the proceeds for the Treasury. But we should have a much better view of those details and dynamics by the week’s end than we do now as we are now beginning the end game of the FCC process to vote on an order.
TMUS/S/DISH Litigation: Judge Issues Opinion on Interesting but Unrelated Matter, CWA and Economists Provide Arguments Against Deal, While FCC Poised to Issue Order to Provide Arguments for Deal.
Judge Marrero Issues Ruling of Tax Return Subpoena: Rejects DOJ Guidance. The Judge who will preside over the merger trial issued a 75-page ruling rejecting arguments from President’s Trump’s lawyers on the Manhattan District Attorney’s efforts to obtain the President’s tax returns. The ruling tells us nothing about how the Judge will view the antitrust arguments in the wireless merger case. Still, it tells us a bit about the Judge. First, he is very efficient. He quickly turned out a comprehensive, through, and by all accounts, conventional decision, deeply grounded in facts and precedent. Second, he did not give significant deference to various DOJ memos the President’s lawyers cited. For example, the Judge wrote “…[T]he theory has gained a certain degree of axiomatic acceptance, and the DOJ memos which propagate it have assumed legal force as if their conclusion were inscribed on constitutional tablets so-etched buy the Supreme Court. The Court considers such popular currency for the categorical concept and its legal support as not warranted. Because the arguments the President advances are so substantially grounded on the supposed constitutional doctrine and rationale the DOJ Memos present, a close review of the DOJ memos is called for. On such assessment, the Court rejects the DOJ Memos’ position.” For investors who believed that the court was likely to simply accept the DOJ’s support of the deal as all it would need to find that the DISH fix satisfies the Clayton Act, the Judge’s decision indicates they should reconsider.
CWA and Economists file against the deal in Tunney Act Review. The Communications Workers of America and, separately, a group of economistsThe economists were not in the employ of either side but are all experts in competition and antitrust.filed in opposition to the deal in the Tunney Act Review proceeding. The two filings provide perhaps the best preview so far of the arguments the states will use at the trial to oppose the deal. At some other time we will analyze the pre-trial filings by both sides to help investors understand how best to gauge the how the actual evidence at the trial affects the odds of different outcomes. For now, we simply wish to note that both documents provide, as we are certain the briefs from the companies will, compelling arguments. That is, while we believe at this moment that the states are more likely than not to win at trial, we view the issue as a close one.When one adds in the low but material chance of a settlement, the odds of the deal closing are, in our view, pretty much even. We hope to have a more definitive view once we have had a chance to read pleadings on both sides but, unlike the AT&T/TWX litigation, we may not have a strong view until we actually see a significant portion of the trial. Of particular note, however, is the economist filing. We think it is particularly notable in providing an argument that generally is seen as a conservative one; that the fix is largely behavioral and has all the potential pitfalls of behavioral remedies often criticized by antitrust chief Makan Delrahim.
FCC Order Upcoming, Providing a Glimpse of the Companies’ Arguments. If the FCC follows its usual practice, this coming week should see the public release of the FCC order approving the merger. As we believe the company lawyers played a significant role in drafting it, we expect the order will enable us to see both the facts and legal arguments that the companies will rely on at trial. In addition, we will find out the treatment of DISH in terms of its obligations on its existing spectrum licenses. We also we see what we expect to be dissents from the two Democrats, which will be helpful in evaluating how important the order will be to trial court judge.
Opponents File Motion to Delay, Setting Up APA Argument on Appeal. We note that a number of opponents to the deal filed a petition with the FCC to delay release of the order until the FCC has done a full investigation of the allegations against Sprint related to Lifeline, and until the public has had an opportunity to formally comment on the original T-Mobile commitments made to the FCC, the commitments T-Mobile made to the DOJ, and the DISH waiver requests. We expect the FCC to reject the request but believe it was filed to provide the opponents a record by which they can challenge the FCC order in court, alleging both errors in the FCC decision but also in the process in terms of violating the Administrative Procedure Act (APA.) As we have noted before, we don’t think this is likely to have an impact on the process but there is a small chance it could cause a delay in the trial. (LINK)
Deal Extension or Renegotiated Version Expected Soon. The T-Mobile/Sprint deal expires at the end of this month. We expect that it will be extended or renegotiated but don’t have any insight into whether it will be done in a way that lowers the amount going to Sprint. We have heard that T-Mobile may try to do so, and indeed, we understand the arguments that the combination of the extra time and concessions that the parties have endured has arguably lowered the value T-Mobile is receiving. We also note, however, that T-Mobile itself has argued that the process and the concessions has not affected its projections of it synergies, profits, and revenues, suggesting that the economics do not require an extensive reevaluation.
More States? Finally we note that there are continuing rumors of other states, particularly Texas, considering taking a deal from T-Mobile instead of continuing with the states pursuing the litigation. For reasons we explained in our note on Mississippi, (LINK) we think it is possible that one or two other states, with Texas being the leading candidate, is possible but unlikely. Moreover, however, we don’t think such a withdrawal will change the odds at trial. Texas withdrawing would slightly improve the odds of settlement prior to trial for the converse of the reasons that we set forth for why Texas joining the litigation lowered the odds of settlement (LINK). Still, we don’t see that change as material.
DISH/DirecTV Stories Persist But No Real Action.
Fox Business reported that Apollo Global Management pitched AT&T on concept of convincing Dish to fold itself into a new company that would include DirecTV and be controlled by AT&T. We note, however, that this idea has been in circulation for some time and there is no evidence that either AT&T or DISH is interested while there is evidence that AT&T is definitely not interested. It is true that the regulatory environment is more favorable for the combination than in the past. (LINK). It is also true that AT&T has brought back a principal player in earlier deals, but we believe he was brought back to help restructure the DC policy shop and not to assist with any deals. In short, we expect to continue to hear about ideas to address the needs of the DISH and AT&T to improve their financial position for their needs ahead while also addressing the changing markets for DBS services. Still, we see no signs of real interest in a merger at this time.
Presidential Lunch: What was on the Menu?
Last week, President and FCC Chair had lunch. Neither the White House nor the FCC was willing to discuss the purpose or topics of the discussion, instead simply describing the lunch as a “family” event. Should investors care?
As we don’t know for sure the agenda, we don’t know the potential investor impact.
We feel confident in dismissing three theories. This was not a family event. While we admire the choice of phrase for its benign public relations meaning, Pai is not a member of the Trump family.Insert your own joke here about Trump family values. Even we have our boundaries for snarkiness, and any jokes involving family fall outside them. But we bet you can think of some good ones. Second, there is close to zero chance that that this lunch was done at the request of the Pai. The President is a highly transactional person who only acts to pursue transactions where he has an interest.See, The Art of the Deal, by Donald J. Trump. There is no reference anywhere in the book to taking a meeting with anyone with the purpose was the other person’s agenda.Third, the lunch was not set up to reward Pai for his “victory”We put victory in quotes because from an industry point of view, the court’s decision to allow every state to adopt their own rules and opening the door widely to a 2021 FCC to reverse the decision is significantly less than a full victory. (LINK)in the net neutrality litigation, as the lunch was set up before the court announced its decision.
We also see as unlikely that the lunch was about something small. It is not uncommon for FCC officials to attend meetings at the White House that involve a number of participants and have a clear policy agenda, though very few involved the President. All of those, in our experience, involved the most pressing elements of the FCC agenda at that time. To our knowledge, this is the only time an FCC chair dined alone with President. In that light, the odds of the agenda being a small thing are itself, very small. Meetings with the President never are and this President in particular, shall we say, thinks big. As to what the agenda was, our quick perusal of a number of contacts resulted in over a dozen theories.The complete list is available on request. We decided, however, not to list them all because some involved what we think many would think of as inappropriate use of power, if not illegality, and we think the evidence is far too weak to even raise such allegations. We were tempted, in homage to the President, to use the ‘a lot of people are telling us’ tactic to suggest things that we are speculating about but realized—and we don’t say this with any pride--we have higher standards. We should also be clear that none of the theories would, in our view, rise to “high crimes and misdemeanors.” Finally we should be clear that while a number of theories involved Trump asking for things that might be inappropriate, there was no evidence or speculation that Pai has or would agree to such a thing.A common one was that Trump wanted to help Pai with the FCC’s conflicts with the Commerce Department. We think that unlikely—though if true it would be good for the wireless industryThe flip side for the wireless industry would be if the President were to be pushing Pai to somehow accommodate Rivada, the not really alive but not quite dead company pushing a national 5G wholesale network that counts Republican bigwigs Newt Gingrich, Peter Thiel and Karl Rove among its supporters. We think it unlikely that Trump will be playing Billy Crystal in this movie.—as we think that if so others would have been there and the White House would have made it clear that was the purpose of the meeting.
We think a more likely scenario relates to Trump’s anger at CNN, most recently for turning down his ads because they contained demonstratively false information.While CNN’s action on the ads was publicly announced a day after the lunch, we think there were discussions between the campaign and CNN before that might have precipitated the discussion. In any event, Trump’s long standing sense of grievance against CNN and other outlets he perceives as offering “fake news,” and his view that the government should do something about that might well have been the origin. We note that the White House has reportedly drafted an Executive Order giving the FCC authority to censor content on social media platforms but that the FCC has told the White House such an order would be legally problematic. Trump has expressed the view that such actions should cause a look at CNN’s “license” and perhaps he summoned Pai either to take that actionOf course we are aware that CNN does not have an FCC license, but as CNN is owned by an entity that is subject to FCC rules, we think this is a case where one should take Trump seriously, not literally. or, perhaps to give a speech suggesting that CNN is violating the First Amendment in taking such action,Of course we are aware that CNN is not the government and therefore cannot violate the First Amendment. But given the Trump Administration’s statements to date on other private platforms, we think this distinction is sometimes lost on them.so as to discourage others from acting as CNN did.Some sources noted that Trump met with Pai around the same time that Attorney General Barr was dispatched to meet with Rupert Murdoch, suggesting the possibility of a multi-prong effort to send signals that News Corp. needs to address Trump’s criticisms of Fox News, or signals related to Trump desiring his own network. So we kinda feel like Crash Davis summarizing the meeting on the mound in Bull Durham: “we’re dealing with a lot of sh*t.”
We note that a number of other theories would involve or impact publicly traded companies. While we don’t want to engage in speculation beyond that which we have already done, we hope some journalist finds out so that we can more effectively evaluate its impact on publicly traded companies.