AT&T/TW Breakup Fee Could Point to Deal Confidence, Fear of Being Burned
The money that could change hands between AT&T and Time Warner if the carrier's planned $108.7 billion buy of the programmer doesn't go through could point to relative confidence the deal will get regulatory approval, or it might reflect the buyer's skittishness about breakup fees since the $3 billion plus spectrum it had to pay T-Mobile after that failed pursuit, experts tell us. AT&T likely also would have been concerned about agreeing to a big breakup fee given the regulatory environment, said George Geis, faculty director of UCLA Anderson School of Management's Mergers and Acquisitions Executive program. Vertical combinations -- like distributor AT&T buying content company TW -- generally get somewhat less regulatory scrutiny than horizontal deals involving two competitors, but the political calls for strict scrutiny of this transaction indicate "it's going to be reviewed, no question," Geis said.
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Terms of such direct termination fees -- which the target pays to the buyer if the deal falls through -- and reverse termination fees, paid to the target, have varied in recent major media deals. AT&T's buy of DirecTV contained no termination fee except in very limited circumstances such as a superior proposal coming along, in which case DirecTV would have been obliged to pay a $1.45 billion fee to AT&T. Charter Communications’ agreements to buy Time Warner Cable and Bright House Networks contained a parent regulatory termination payment of $1 billion to $2 billion, depending on the circumstances of the termination. Comcast’s proposed takeover of TWC didn't contain termination fees except in the case of "intentional and willful failure" of one party to fulfill a condition or a material breach of the agreement, in which case that party would be liable for all damages, including "to the extent proven the benefit of the bargain lost by a party’s stockholders." The Comcast/TWC agreement didn't attach a dollar amount to that term.
AT&T didn't comment except to say if the deal doesn't close because of government and regulatory approval issues, it agreed to pay TW $500 million "in respect of its time and expenses." TW didn't comment. The AT&T/TW agreement also includes a possible $1.73 billion direct termination fee to be paid to AT&T if, for example, TW goes with a better offer. The last time Time Warner was bought -- by AOL, in 2000 -- the deal included breakup fees that would see either party pay to the other an amount up to the equivalent of 2.75 percent of its fully diluted number of shares multiplied by the closing price of AOL stock.
Breakup penalties generally are a risk mitigation measure for one of the parties, with the size of the fee typically going up the greater the risk of the combination not going through, said University of Houston Law professor Darren Bush. "It is meant to compensate the purchased for time, effort, all that other good stuff if the [buyer] backs out of the deal.” Horizontal deals typically see higher breakup fees, since they face more risk of a DOJ challenge than vertical ones, he said.
The AT&T/TW termination payment could be seen as too small, given the risk of the deal not going through, since regulators have seemed particularly concerned about the types of vertical integration harms -- such as a distributor favoring its own content -- the deal raises, said a lawyer with cable clients and deal experience. Aside from confidence in the regulatory approval, other factors that could drive up the breakup fee include the size of the deal and negotiated trade-offs between the size of the breakup fee and other terms, said a communications lawyer.
The size and terms of breakup penalties are highly negotiated and depend considerably on the context of a deal, Geis said. Direct termination fees customarily top off at about 2 to 3 percent of the total size of a deal, he said. There are no standards on the size of indirect termination fees he said, saying at $500 million, the AT&T/TW fee is "pretty modest." AT&T was maybe skittish about any such fee, but TW might have wanted some kind of guarantee, he said: "$500 million isn't necessarily chump change." But too high a reverse termination fee can also have a chilling effect on better offers coming in, he said.