Unscrambling the Egg? What to Watch in the Nexstar/Tegna Merger Challenge
On April 17th, Judge Troy Nunley of the Eastern District of California issued a preliminary injunction (PI) prohibiting the further integration of Nexstar and Tegna and requiring Nexstar to hold separate all Tegna assets pending adjudication of state enforcers’ and private plaintiff DIRECTV’s Clayton Act Section 7 claims on the merits. The court concluded that both sets of plaintiffs had demonstrated a reasonable probability of success on the merits. This sets up a rare merger control refight to try to unwind a deal after it has closed.
The preliminary injunction came three weeks after Judge Nunley granted a temporary restraining order (TRO) enjoining the two major broadcast companies from further integrating their businesses and requiring Tegna to continue operating independently. While Nexstar is appealing the ruling, this halt to the $6.2 billion acquisition—a win for the eight Democrat-led states and DIRECTV—is an inauspicious beginning to what may be a prolonged legal battle for the parties.
Given the current political and legal environment, companies contemplating sizable transactions of their own should keep in mind the following key takeaways.
Key Takeaways:
- Prior cases provide persuasive precedent on relevant markets: The court found market definitions used by the Department of Justice Antitrust Division (DOJ) in previous broadcasting industry cases to be persuasive and adopted those same product and geographic markets.
- The court embraced a 30% market share presumption of competitive harm: The PI Order relies on the 30% combined firm market share threshold for presuming that a transaction harms competition as established in Philadelphia National Bank and re-enumerated in the 2023 Merger Guidelines.
- The private challenge wildcard: DIRECTV’s success may embolden other customers and suppliers to litigate either independently or in conjunction with state or federal enforcers.
Background on the Merger Litigation
On March 18th, eight Democrat state attorneys general and DIRECTV separately filed suit to permanently enjoin Nexstar’s acquisition of Tegna, one day before the parties closed the deal after receiving approval from the Federal Communications Commission (FCC) and early termination from the DOJ. Both sets of plaintiffs then filed separate TRO motions seeking to enjoin integration, which the court granted on March 27th—more than a week after the deal was consummated (for further background please see our prior blog post).
The plaintiffs alleged that the combined entity would wield substantial market power within each FCC-regulated broadcast licensing region such that it could increase signal retransmission fees for distributors like DIRECTV and, in turn, subscription costs for consumers of “Big Four” (ABC, CBS, NBC and Fox) programs. Additionally, the plaintiffs raised concerns that consolidation of newsrooms could degrade the quantity and quality of local news coverage.
Reliance on Agency Market Definitions in Prior Actions
In his April 17th PI Order, Judge Nunley agreed with the states and DIRECTV’s proposed definitions of the relevant product and geographic markets as the retransmission consent licenses for the “Big Four” broadcasting stations in a Designated Market Area (DMA). He found that the “Big Four” are reasonably interchangeable with one another because of their unique and highly sought-after combination of local news and live sports, but not reasonably interchangeable with other stations or MVPDs. The judge relied in significant part on the DOJ’s use of the same market definition in prior enforcement actions.
More notably, the fact that neither the DOJ nor the FCC sought to challenge the merger has not insulated the transaction from plaintiffs’ antitrust challenge thus far. The court found that “[r]egulatory oversight did not curb the manifest anticompetitive effects” of the merger. The court emphasized that because the FCC is not endowed with the power to decide antitrust issues, its approval of the merger carries little weight with respect to procompetitive efficiencies. DOJ closed its review through early termination and did not formally demand any remedial measures.[1]
Embracing the 2023 Merger Guidelines’ 30% Market Share Presumption
In finding that the plaintiffs established a prima facie case that the merger is anticompetitive, the court held that (1) the combined firm’s market share of more than 30% and (2) the over-100 point increase in the Herfindahl-Hirschman Index (HHI)—a measure of overall market concentration—created a presumption that the merger was likely to violate the antitrust laws. The 30% combined market share threshold for presuming competitive harm, first enumerated inUnited States v. Philadelphia National Bank in 1963, was brought back to the fore by the 2023 Merger Guidelines. Here, the PI Order noted that Nexstar and Tegna would collectively exceed 30% share in 31 DMAs, including 16 DMAs where the combined market share would reach over 50%. Additionally, the court found persuasive plaintiff expert declarations showing that the merger would result in HHI deltas exceeding the 100-point threshold set forth in the 2023 Merger Guidelines. Based on these metrics, the court concluded that the merger was “presumed likely” to violate the antitrust laws. Judge Nunley’s citation to the 2023 Merger Guidelines is yet another indication that the Guidelines—while not themselves law—may nevertheless be persuasive in court.
The Risk of Private Challengers
Historically, private parties have not commonly played active roles in challenging mergers,[2] but DIRECTV appears uniquely situated to advocate for its theories of harm. In its filings, DIRECTV stated that it has suffered from signal blackouts on several occasions in past years due to disagreements with Nexstar and Tegna over retransmission licenses. It also noted that it faces contract renewal negotiations with Nexstar later this year, which bolsters its claim that it will suffer irreparable harm as a result of the transaction. Nexstar, on the other hand, accuses DIRECTV of bringing the lawsuit to try to maximize its leverage in upcoming negotiations.
DIRECTV has also intervened in a parallel set of proceedings at the D.C. Circuit, seeking an emergency motion to stay the FCC order approving the acquisition. It joined forces with a broad coalition of broadband and cable associations, public interest organizations, labor unions, and media companies like NewsMax in suing the FCC. There, the appellants argue that the FCC’s Media Bureau unlawfully waived a statutory cap of 39% for national-audience reach and failed to address evidence of harm arising from having a combined entity that would service around 80% of U.S. households.
Looking Ahead
At the time of closing, all the conditions precedent under the Nexstar/Tegna merger agreements were met. The parties had received the requisite regulatory approvals, and no court had issued injunctions of any kind. However, given the current climate where states and private parties are increasingly asserting themselves in antitrust enforcement, companies should consider these potential scenarios when negotiating merger agreements and evaluating and allocating risk.
[1] Nexstar voluntarily announced a commitment to divest six stations and freeze retransmission fee rates to MVPDs until the end of 2026 as part of its FCC clearance.
[2] The last time a private party successfully brought suit to challenge a merger was the 2021 case of Steves & Sons, Inc. v. JELD-WEN, Inc., in which the Fourth Circuit affirmed a divestiture order four years after the transaction had closed. But the fact that the merging parties in JELD-WEN largely kept their assets and personnel separate distinguishes it from Nexstar/Tegna, for as Judge Nunley noted in the PI Order, the immediate integration stipulated in the Nexstar/Tegna merger agreement would lead to “immediate” injury as certain aspects of the merger cannot be undone.
