Deal Dynamics Under Antitrust Fire: Contrasting AT&T/T-Mobile and Express Scripts/Medco January 29, 2013 2013 Dechert LLP
Topics Antitrust and politics of Express Scripts/Medco Contrasting AT&T/T-Mobile Guidance for managing regulatory risk on your next deal 2
Express Scripts/Medco: PBM Industry Medco based in Franklin Lakes, NJ PBMs negotiate discounts with pharmacies and pharmaceutical manufacturers on behalf of employers Pharmacies Pharmaceutical Manufacturers PBMs Sell Employers 3
Express Scripts/Medco Transaction $34 billion combination of 2 of the 3 largest U.S. PBMs announced in July 2011 2 nd largest announced deal of 2011 after AT&T/T-Mobile Congress had previously forced FTC to conduct industry studies Prior FTC investigations 4
Express Scripts/Medco Investigation Investigated for 8 months by FTC and more than 30 State AGs Over 80 members of Congress publicly expressed concerns to the FTC; two congressional hearings Last-minute private lawsuit attempting to block deal 5
Express Scripts/Medco: Outcome Largest deal to close in 2012 Unconditional clearance: no remedies or divestitures Private lawsuit fails Deal closes on schedule 6
Antitrust Risk Assessment What is the likelihood the deal will be cleared unconditionally? Will divestitures be needed? What types of divestitures? 7
Antitrust Timing Considerations Will there be a second request? How long will the process take? What can be done to control the timing and minimize delay? 8
Allocating Risk: Balancing Deal Value and Deal Certainty Covenants (divestiture and other remedies) Conditions (pending litigation or investigations) Medco s proposed sale to Express Scripts comes at a high 28% premium. However, given the antitrust risk,... the deal agreement is marked by an interesting omission: there s no reverse breakup fee. Termination provisions (timing; reverse breakup fees) 9
State AGs Over 30 State AGs joined the FTC in investigating the merger State AGs tend to be budget-constrained and do not have economic staff Impact on timing 10
Political Opposition Merger announcement spawned opposition websites, newspaper ads, radio ads, and intense lobbying 11
12 Political Opposition
Political Opposition Senate and House Antitrust Subcommittees held hearings Medco Air Cover strategy allowed FTC do its job 13
Political Opposition 14
Express Scripts/ Medco House Hearing 15
Medco s Air Cover Strategy Meetings with key Senators, Representatives, and Congressional staff important to the FTC Draw on facts, not favor banks Focus on benefits rather than support Distinguish customer views from competitor views Ruthless message consistency internal documents, external lobbying, and FTC/State AG advocacy 16
Slogans vs. Commercial Realities OPPOSITION 17 The merger will reduce the number of large PBMs from 3 to 2. The market... consists of at least ten significant competitors. For large employers and unions, the big three are the only three real alternatives. The fact that many large employers currently use a PBM other than one of the Big Three.
The Right Result 18
AT&T/T-Mobile Transaction $39 billion deal announced in March 2011 Combined 2 of the 4 largest U.S. wireless providers Promoted as job-creating and promised to extend 4G coverage to 97% of population AT&T/Centennial and Verizon/Alltel received clearance, subject to divestiture AT&T/T-Mobile investigation DOJ, FCC, and State AGs 19
AT&T/T-Mobile: Outcome DOJ sued to block merger 7 State AGs joined DOJ suit Competitor lawsuit Parties abandoned transaction 20
Political Opposition to AT&T/T-Mobile Senate and House Antitrust Subcommittee held hearings 21 Witnesses included CEOs of AT&T, T-Mobile, Sprint, and Cellular South as well as consumer groups Only 2 Senators (Kohl and Franken) publicly opposed the merger At least 27 state governors,11 state AGs, and 72 House Democrats publicly supported merger No Takeover Project launched by Sprint, Cricket, Earthlink, several consumer groups, and an association of 100 smaller wireless carriers
Political Opposition to AT&T/T-Mobile 22
Political Opposition to AT&T/T-Mobile 23
AT&T s Lobby to Success Strategy [W]e appreciate that 11 state attorneys general and hundreds of other local, state and federal officials are publicly supportive of our merger. AT&T Statement 24
AT&T s Job Promotion 25
Stubborn Facts Bad internal company documents Company data unhelpful T-Mobile a maverick competitor Efficiencies claims contradicted 26
Bad Internal Company Documents * Image created based on quotes in DOJ complaint. 27
Bad Internal Company Documents * Image created based on quotes in DOJ complaint. 28
Company Data Unhelpful [A] significant portion of customers who churn from AT&T switch to T-Mobile, and vice versa. This shows a significant degree of headto-head competition between the two companies. - DOJ Complaint 29
T-Mobile a Maverick Competitor T-Mobile... places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition. - DOJ Complaint 30
Efficiencies Claims Contradicted AT&T claimed the only way to expand its 4G coverage to 97% of U.S. population was via the $39 billion acquisition But AT&T s internal documents suggested the same expansion could be completed without the merger at a cost of only $3.8 billion 31
Antitrust Risk-Shifting: Reverse Break Fee Selling companies face the potential losses of key employees and customers Thus, deals can be won or lost in the agreement s risk-shifting provisions AT&T paid $4 billion reverse breakup fee 32
A Tale of Two Transactions Express Scripts / Medco Merger Involves Leading Firms Public Opinion Risk Assessment Strategy Result 33 AT&T / T-Mobile #2 and #3 #2 and #4 Vocal congressional opposition Outspoken opposition from industry advocacy group Opposed by large, well-funded competitor (Walgreens) Mixed reviews from Congress and advocacy groups Public support from groups that received AT&T largesse Opposed by large, well-funded competitor (Sprint) Front-loaded, data driven evaluation showed difference in competitive focus and changing competitive landscape Track record of successfully concluding acquisitions based on local market analysis and acceptable level of divestitures Cooperate with FTC and states Coordinate PR and legal strategies to enable FTC to make decision based on facts and law Aggressive PR and lobbying strategy Adversarial posture with FCC Apparent failure to communicate with DOJ FTC and state AG clearance without conditions 11th hour private suit falls short DOJ states and competitors sued to block transaction FCC opposed transaction Parties abandoned deal
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