Follow Up: AT&T Plans To Buy Time Warner Hit Snag

In a follow up to a recent piece on this potential merger, the plans for AT&T to obtain Time Warner for $85 billion hit a snag on Wednesday. The government regulators involved have interceded and have stated that AT&T has to sell either CNN and other related network holdings within Turner Broadcasting , or sell their ownership stake in DirecTV in order for the deal to move forward.

This consolidation of ownership or control of so much content is the issue at hand for the federal regulators. The most honest assessment of this merger is that the control of content was always going to be an issue with this proposal.

The fact remains that AT&T would have too much control over both sides of the content pipeline in their proposed arrangement, that it can have drastic impact on price controls for the consumer.

The average viewer is now streaming more content than ever before, and AT&T has a master strategic plan to become a larger player in the streaming content side of the business. Their purchase of DirecTV started that process with the introduction of a streaming service for customers of that satellite service which has garnered fairly good reviews.

The more troubling aspect of the news today was the response by AT&T who have doubled down on their stance that they will fight any changes to the deal. They are bullishly against selling any assets and are essentially going to attempt to “push through” one of the largest telecommunications mergers in American history.

The pursuit of Time Warner by AT&T has been fraught with problems from the outset. In my view, I can understand why both sides want to get something done in the way of consolidation: Time Warner is struggling to keep their vast media empire relevant in a rapidly changing landscape where print media is dying, and television is becoming increasingly competitive. AT&T would gain a tremendous amount of content for their own service via DirecTV and would be able to charge other industry players for their content.

The major issue is that the merger would make AT&T too gigantic and put their hands into “too many pots” which is an anti-trust conflict in the purest form. AT&T could charge more for cellular phone service or for the apps for the content on the smart phones. AT&T could wield enormous influence over the carriage agreements of all the current Time Warner broadcasting mediums.

The divestiture of one of these assets as identified by the federal regulators is absolutely necessary when you consider the size of Time Warner and the diversification of AT&T. The “mega mergers” of recent years have all had some sort of pothole on the way to fruition.

However, in this case, we are left to consider this question: what if AT&T sells Turner Broadcasting and the deal still does not gain approval? What if the deal never is approved by the regulators?

I am not sure at this point who would be in position to purchase Turner Broadcasting while also maintaining approval from the regulators involved. The deal may never gain approval, that is a realistic possible outcome at this point. The most likely outcome would be that Time Warner is sold off in pieces to different competitors in each of the media spaces they operate within.

This is a developing situation and where it leads could have a massive impact on the consumer in the coming months. The growth of AT&T is alarming and the argument can be made that they should be stopped, it remains to be seen if that will take place.

The Next Chapter For Rite Aid or Is it the Last Chapter?

The past few years have featured some major mergers and consolidations across a variety of business segments. It is rare to have a proposed “mega merger” result in a change of course, but in the case of the Walgreens deal to merge with Rite Aid in the retail pharmacy space, that is exactly what transpired.

Walgreens, after repeated attempts to find ways to satisfy the anti-trust regulators, announced that they had disbanded their pursuit of a merger with Rite Aid. The most recent proposed framework of the acquisition had Walgreens and Rite Aid both selling store locations to a Southeastern based retail drug store and discount store chain, Fred’s, done in pieces through a series of transactions.

The proposed framework left regulators and industry analysts concerned that Fred’s could essentially double the size of their company overnight and not sustain any major setbacks.

The proposal also left many in the government regulatory positions feeling unsettled with the potential size of the combined Walgreens/Rite Aid chain and the impact that could have on the consumer. The combined entity would also have tremendous influence with pharmaceutical distributors regarding price and other factors, which made interested parties in the pharmaceutical area very concerned as well.

In the end analysis, Walgreens determined that it was no longer a viable pathway to grow their business, and the proposal with Rite Aid was terminated. The transactions with Fred’s never took place, and the whole deal fell apart very rapidly. The natural next question is: what is the next step for Rite Aid?

Rite Aid has sustained five straight losing quarters and their stock has lost a significant amount of value. They will receive $35 million from Walgreens in a termination fee because the merger was scuttled. Rite Aid also announced it will sell about half of their store locations in their current business footprint. Many of those stores will be sold to Walgreens, which is a strange turn of events because regulators were concerned about Walgreens getting bigger if the merger was approved.

Walgreens stands to gain more store locations in certain markets because the merger was scrapped. Some investment analysts maintain that Rite Aid could turn their business around because they will have streamlined their operations to focus on just half the amount of store locations than they have in their current footprint once the sale of the store locations becomes final.

Conversely, some investment analysts and industry experts are concerned that Rite Aid has serious issues and that the company will still fail, despite the efforts to streamline their business operations. The sale of some of these locations will relieve some of the debt load for Rite Aid, but they still have some significant hurdles to overcome.

The strategic decision by Rite Aid to sell all their locations in certain marketplaces will certainly help the company to remain focused on their core customer bases in the Northeast and along parts of the East Coast. The distribution systems should improve in this streamlined approach, and the distribution network will be far more targeted which will also provide cost savings.

Rite Aid is a staple brand in the retail drug store channel, especially in the Northeast. The future of the company is reliant upon their marketing efforts to reconnect with their core customer base in that geographic market. They will also face external pressures from much larger competitors such as CVS/Caremark, Wal-Mart, and Walgreens.

The opportunity for Rite Aid to merge with another competitor is still a possibility, but the best opportunity for their brand was to merge with Walgreens. It is going to be difficult to find another partner that would not want to just swallow them whole, and the other chains are essentially too small to make an impact on their competitive position in the industry segment.

The decision to streamline their operation will, at the very least, buy them some time to reevaluate their options. The next chapter for Rite Aid appears to be a return to their roots, and to focus on their key strategic markets in the Northeast. It remains to be seen if this change in strategy can be enough to bring the company out of the slump that they have been mired in for several months.

It remains to be seen if this next chapter is the last chapter for yet another iconic American brand in an increasingly competitive retail landscape.