Higher Hurdles for Mergers in Regulated Industries: Lessons from the Failed Standard General/Tegna Deal
Law360 recently published an article by Baker Botts Partner Jody Boudreault and Senior Associate Katherine Dutcher.
A version of this piece can be read on Law360, here.
Standard General’s proposed multi-billion-dollar acquisition of broadcaster Tegna died under an aggressive and lengthy Federal Communications Commission (FCC) merger review despite clearing the Hart-Scott-Rodino (HSR) waiting period without challenge from the U.S. Department of Justice (DOJ). The deal collapse serves as a warning to firms in regulated industries, which should take special note of the administration’s “whole of government” approach to antitrust enforcement first articulated in President Biden’s Executive Order 14036. It is well-known that under the Biden administration the antitrust agencies have heightened procedural and substantive hurdles that parties must clear in antitrust review of their M&A. The ‘whole of government’ approach adds even higher hurdles—greater substantive risk and longer timelines to transaction approval in parallel regulatory agency merger review. This article will discuss these higher hurdles, as evidenced by the failed Standard General/Tegna deal.
As Lael Brainard, National Economic Council (NEC) Director and White House Competition Council Chair, remarked, the government is “making promoting competition the mission of the whole of government” and “enlisting agencies beyond the traditional antitrust enforcement agencies . . . to expand competition policy to new frontiers.” Multiple federal regulatory agency actions demonstrate this expansion and the higher hurdles for merging parties:
- The U.S. Department of Transportation (DOT) announced that it fully supports the DOJ’s lawsuit to block the proposed JetBlue/Spirit merger and is also conducting its own investigation.Additionally, DOT is using its public interest, unfair and deceptive practices, and unfair methods of competition statutory authority to investigate the JetBlue-Spirit transfer application for international routes.
- TD Bank and First Horizon mutually terminated their merger agreement because TD Bank “does not have a timetable for regulatory approvals to be obtained for reasons unrelated to First Horizon.”The proposed merger had been under review by the Office of the Comptroller of the Currency for over a year.
- The FCC, in its review of the proposed Standard General/Tegna acquisition took the unusual procedural step of referring the public interest issues to an administrative law judge (ALJ) for investigation.The ALJ then suspended the hearing proceeding until after the outside date for the parties’ financing expired. Substantively, that these specific issues received an extended investigation was also unusual: (1) pre-existing ‘after acquisition’ vendor contract clauses that allow the post-merger company to use the better of the parties’ contract rates, and (2) employment matters.
The regulatory review of these transactions signals how the administration aims to reduce merger activity by aggressively using “underutilized authorities” at agencies outside of DOJ and the Federal Trade Commission (FTC). Indeed, Ms. Brainard promised that this is the new normal: “So let me be very clear today: We’re just getting started, and we remain committed to finishing the job.”
With this background in mind, a deeper look at the Standard General/Tegna investigation suggests some practical steps to get deals to closing that firms should consider when dealing with multiple federal agencies.
Review of the Standard General/Tegna Deal
In February 2022, hedge fund Standard General announced its proposed acquisition of broadcaster Tegna, which owns two full-power radio stations and 64 TV stations in 51 U.S. markets. The deal was reviewed by DOJ and the FCC.
The parties filed their HSR notification with the antitrust agencies on March 8. DOJ investigated through the “second request” phase, although little was reported on DOJ’s investigation at the time. In February 2023, Standard General reported the HSR waiting period had expired without a challenge. Recently, the parties disclosed that DOJ extensively investigated the application of after-acquired clauses from an antitrust perspective, “including hours of depositions and millions of pages of documents,” and did not challenge the transaction in light of Standard General’s commitment to waive after-acquired clauses. The parties seemingly cleared the initial antitrust agency procedural hurdle, although it is unclear whether DOJ closed its investigation. Given the whole of government policy, we must assume that DOJ and FCC communicated about their respective investigations.
On the regulatory side, the parties underwent not only classic FCC review, but heightened review under the FCC’s “public interest” authority, which proceeded to a rather novel referral to an ALJ to investigate potential increased retransmission consent fees and newsroom layoffs. Standard General unsuccessfully sought to expedite the FCC’s ALJ review process and compel the Commission to rule on the broadcasters’ application prior to May 22 when the deal’s underlying transaction agreement and financing arrangements expired. The D.C. Circuit, however, found appeal of the hearing designation order premature as not a final agency action. Separately, in rejecting Standard General’s mandamus petition, the D.C. Circuit held that the merging parties had shown neither that the FCC has “unreasonably delayed in acting on their applications,” nor that the FCC has a “crystal clear” duty to rule on their application without a hearing.
After their federal appeals were denied, the parties submitted proposed hearing schedules to the ALJ. Standard General proposed no discovery and requested that hearings conclude by May 17 before the underlying transaction agreement and financing arrangements expired on May 22, 2023. In contrast, the FCC Enforcement Bureau sought a six-month discovery period followed by six months of pre-hearing motions. On April 27, the ALJ suspended the hearing proceeding “until further notice,” reasoning that discovery would take the hearing beyond the May 22 deal deadline and “the underlying transactions might not survive past [that date.]” Standard General called this “a deliberate move to kill the transaction . . . .” Indeed, Standard General’s proposed $8.6 billion acquisition of Tegna was effectively blocked by the FCC’s public interest review process.
Public filings indicate the FCC had two main substantive concerns. One concern was potential higher pay-TV prices post-closing. Higher prices would not result from antitrust-related anticompetitive effects of the merger, rather they would arise from legal, pre-existing contract clauses (common across industries) invoked by the transfer of ownership. Specifically, closing would trigger ‘after-acquisition’ clauses in current retransmission consent contracts, allowing the broadcaster to charge the higher fee from an existing contract to a current Tegna station that would be controlled by Standard General after closing. Facing higher costs, pay-TV providers could potentially pass cost increases on to consumers.
The antitrust agencies episodically investigate pre-existing contractual clauses that may increase prices for customers post-closing in enforcement matters, although seemingly not as a basis for a stand-alone merger challenge. Rather, historically, these clauses have complemented other evidence suggesting a transaction is anticompetitive.
The FCC has frequently treated contractual price increases as benign and, without more, not a basis to oppose a deal. For example, in granting approval of the Nexstar/Media General and Tribune/Nexstar transactions in January 2017 and September 2019, respectively, the FCC rejected a third-party’s argument that after-acquired station clauses in existing retransmission consent contracts cause rates to reset at the higher level of the acquiring station, forcing television companies “to either absorb the increases or pass them on to their subscribers.” Instead, the FCC found, “[A]fter-acquired station clauses are negotiated by the parties outside of this transaction, and there is no apparent reason for the Commission to . . . deny one party the benefit of the negotiated bargain absent evidence of anticompetitive practices or other wrongdoing not apparent here.”
A second FCC concern was potential cost-cutting layoffs at local stations, inferred from Standard General’s statement that Tegna’s local stations have too many employees. Historically in antitrust review, cutting duplicative staff is a potential efficiency that could lead the merged firm to lower prices, spurring increased competition with rivals. The FCC, however, reviewed the potential layoffs for their impact on “localism”—the displacement of local content and the expansion of national content.
Standard General argued that these issues fall outside the Commission’s purview. It made several concessions in these areas by committing to maintain current retransmission fees, pledging not to lay off Tegna newsroom employees for three years post-transaction, offering a 20% increase to local news budgets and programming across Tegna-owned stations, establishing a $5 million local journalism grant fund and pledging diversity, inclusion, and non-disparagement of unions.
We will never know whether Standard General’s concessions would have alleviated the FCC’s concerns.
FCC Public Interest Review
Under the Communications Act, Congress charged the FCC with assigning licenses and authorizations, such as broadcast radio and television licenses. FCC approval is also required before control of a company holding a license or authorization is transferred. The FCC must therefore review all telecommunications M&A. Specifically, the FCC reviews transfer and assignment applications to determine whether the proposed transaction would serve “the public interest, convenience, and necessity” pursuant to 47 U.S.C. § 310(d). Although the FCC considers competitive effects and generally tracks the DOJ and FTC Merger Guidelines analysis, as the D.C. Circuit recognized in U.S. v. Fed. Commc’n Comm’n, 652 F.2d 82, 88 (1980), the FCC is “not strictly bound by the dictates of (the antitrust) laws.” This presents unique challenges for parties to communications transactions.
The FCC does not oppose the majority of transfer of control and assignment applications but reviews applications more extensively if they raise complex legal, economic, or public interest issues. The Commission’s informal timeline for review of a transaction is 180 days. After more than 438 days since March 10, 2022, when the parties first filed FCC applications to transfer interests in Tegna, the FCC still had not ruled.
Merger Review—Higher Substantive Hurdles
Clayton Act § 7 charges the antitrust agencies with challenging transactions whose effect “may be substantially to lessen competition.” That means that the agencies seek to block mergers that enhance market power. Enhanced market power is likely to result in increased prices, reduced output or diminished innovation, or make it more likely that the merged firm can profitably and effectively engage in exclusionary conduct. Under this administration the agencies have increased the substantive hurdles that merging parties must overcome by regularly extending review to labor, data, and vertical issues that were previously less important in an investigation.
FCC merger review today similarly includes higher substantive hurdles. In prior FCC reviews, the FCC typically stayed within a Section 7 analysis, even though its public interest standard may be broader. In reviewing the Standard General/Tegna deal, however, the FCC appeared to address the after-acquisition clauses not as an antitrust issue. The FCC Chairwoman wrote that “retransmission consent fees can result in pressure for retail price increases . . . to the detriment of consumers, and therefore, the public interest.” She suggested an increase in retransmission fees can constitute a public interest harm if they result from the unique structure of the transaction. The FCC also appeared to be assessing the proposed transaction’s impact on jobs outside of an antitrust analysis, underscoring the potential impact of job reductions on “localism.”
The fact that the FCC deployed legal pre-existing contract clauses and potential layoffs as substantive issues under its merger review authority both raises the substantive hurdle that merging parties must meet and complicates the timing of the review.
- Initial Risk Appraisal.Factors like labor cost reductions or contractual opportunities to increase revenue that might have seemed benign aspects of deals in the past now make it harder to clear substantive regulatory hurdles.Firms should be careful not to rely on those past perceptions in this new world.
- Regulatory Uncertainty. While regulatory uncertainty has increased at the antitrust agencies under this administration, a potentially synergistic increase in uncertainty emerges from parallel review by other regulatory agencies.
- Deal Timeline. The FCC (or other agency’s) transaction review process can cause delays that effectively block a deal regardless of an agency’s ultimate decision on a deal.
In light of the “whole of government” approach to reducing M&A, regulated companies should take the following three steps when contemplating an acquisition:
- Reconsider Timelines.When negotiating agreements, parties should think more broadly about the additional time that may be required (beyond an HSR investigation) for a second agency’s review.
- Fully Understand Your Risk at the Beginning.In constructing regulatory strategies, parties should more fully understand risk at the beginning to better inform mitigation and advocacy stances.
- Recognize Higher Hurdles for Regulated Industries. In devising strategies for deal management and advocacy, parties should recognize that regulatory deals face higher hurdles of timing and substantive review.Whether the strategy is to gain clearance without a remedy or to seek a remedy to avoid a challenge, construct that strategy in light of the higher hurdles.
The administration’s policy to draw out merger investigations at regulatory agencies over theories not related to traditional antitrust competitive effects is a significant development that will impact future M&A in regulated industries.
Jody Boudreault is a partner and Katherine Dutcher is an associate at Baker Botts LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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