The European Union’s antitrust watchdog came out Monday with a preliminary recommendation to block the proposed Time Warner-AOL merger, making it more likely than ever that the two behemoths will have to make some big concessions to get their deal done.
The companies and EU regulators are already deep in talks on ways to make the deal palatable across the Atlantic. While the EU can’t officially block the merger of two U.S. companies Stateside, it could lock them out of Europe, a large and growing market the partners are eager to exploit.
Observers cautioned that preliminary EU reports are often negative, used by regulators to extract concessions while they can from companies who will be the only ones calling the shots once their deals close.
“This is a normal part of the process with the EU. We are totally comfortable with where we are at this stage of the negotiations. We have made excellent progress and are confident the talks will conclude successfully. As we have said, we are on track to close in the fall,” Time Warner and AOL said in a joint statement.
Both companies, particularly AOL, need the deal. AOL shares have weathered Wall Street’s battering of the Internet sector better than many other ‘Net companies largely due to its alliance with Time Warner.
But lately, regulators have taken a hard line in some sectors, including telecommunications. Earlier this year, the EU and the U.S. Dept. of Justice both ruled against a planned $130 billion merger between WorldCom and Sprint.
The EU is also casting a critical eye on Time Warner’s proposed purchase of U.K. music group EMI. Time Warner and EMI are scheduled to present a revamped plan to regulators Tuesday. “We’re in discussions with them and have offered some concessions,” said a person close to Time Warner. Reuters news service reported late Monday that Time Warner-EMI will offer to sell local music labels, probably in Spain, France and Denmark, where the EU has expressed concern over the combined companies’ high market share.
European regulators are concerned that a combined AOL-Time Warner-EMI would dominate the developing field of music over the Internet.
EMI plays along
An EMI spokeswoman said company officials met with EU competition commissioner Mario Monti and the merger task force Monday morning.
“We will be submitting formal undertakings to the commission before the deadline tomorrow and we will be working with the commission toward final settlement of our case. We believe that our proposed settlement fully addresses all the concerns raised by the commission,” she said.
The U.S. Federal Trade Commission is also examining the $113 billion AOL/Time Warner combination and is expected to issue its initial recommendations this week. But final rulings are likely to come from Europe first.
Stateside, many Time Warner competitors, egged on by Walt Disney, have protested what they see as a merged company’s potential to hinder the distribution of non-Time Warner content over AOL’s Internet pipelines.
Wall Street shrugged off the news from Europe Monday, with Time Warner rising 1.8% to $81.25 and AOL up 0.6% to $55.56.
(Justin Oppelaar contributed to this report.)