As Disney's blockbuster acquisition of 21st Century Fox assets enters the home stretch, one lingering risk to the deal has some industry watchers holding their breath: pending regulatory clearance from China. With President Trump escalating his trade war against China by the week, Beijing has been scrambling to retaliate. Multiple U.S. investors are on edge over the prospect that China could resort to weaponizing its antitrust approval process to stymie the ambitions of America's corporate giants.
By far the most high-profile such deal under review by Chinese market regulators is the $71.3 billion Disney-Fox merger, which has a deadline of Oct. 19. "The talk is that China will consider all available options to respond to Trump's tariffs, including using Chinese antitrust laws to target deals that are perceived to have a strong U.S. tie," says Adams Lee, an attorney at the law firm Harris Bricken in Beijing. "So it is a very real possibility that Disney-Fox could be viewed by Chinese authorities as a potential candidate to target."
Although already given a green light by shareholders and the U.S. Department of Justice, the Disney-Fox deal requires antitrust approval from a number of national regulators around the world. And the growth of China's massive marketplace gives Beijing's voice, in particular, considerable sway. American chipmaker Qualcomm, for example, saw its $44 billion acquisition of a Dutch semiconductor company go bust in July when China declined to rule on the transaction.
China’s antimonopoly agency, the State Administration for Market Regulation, never commented publicly on the proposed transaction. Instead, it simply let the clock run out without extending approval. The action — or lack thereof — was widely interpreted as a response to Trump's trade war.
China parried Trump's initial $50 billion round of tariffs dollar-for-dollar. But when the White House slapped a 10 percent tax on another $200 billion in Chinese goods last month, Beijing was forced to entertain more creative tactics — simply because it doesn't import nearly enough goods from the U.S. to match the levies.
Undercutting the Disney-Fox pact would mark a considerable escalation from the Chinese side, however. And it could cause a range of repercussions thanks to the deal's high degree of visibility.
"Such a Chinese decision would undermine all of their arguments to persuade Americans that a trade war is misguided and one-sided, with all the blame on Trump," notes Stanley Rosen, a professor at USC who specializes in China's culture industries.
China also has worked to make the case to the world that it is a staunch supporter of globalization, in contrast to Trump’s "America First" policy. Rosen explains: "But if they oppose this deal they will send a message that would rattle not just American, but European and other multinational corporations, which would very likely have an effect on investors and those companies doing or planning to do business in China."
Bloomberg has estimated that less than 2 percent of Fox's overall revenue is generated in China. But Beijing regulators are likely to focus mainly on the one area where the two companies' combined strength could be problematic: the theatrical film market. U.S. studio films accounted for more than 40 percent of overall box office in China in 2017, with Disney leading the pack.
China raising antitrust objections within the scope of first-run theatrical films in English "doesn't seem completely implausible," argues Thomas Brown, an antitrust attorney at law firm Paul Hastings. "That's the game that gets played with antitrust authorities around the world: regulators want to define a narrower market; the lawyers defending the deal try to define a broader market. Then you argue about efficiencies and whether there are sufficient competitors to discipline price statistically."
Brown notes that China's big challenge would be to "argue that there isn't still a sufficient number of U.S. competitors [to Disney and Fox], as well as new entrants," in the Chinese theatrical market.
However, given that Beijing is known to get more exercised over the influence of foreign media and content companies than nearly any other issue, apart from state security, opposition to the Disney-Fox deal can't be ruled out.
Disney's last known public comment on the topic came during the company's Aug. 7 earnings call, when Iger, responding to an analyst's question about the regulatory process in China, said: "We have no updates regarding the regulatory filings." He reiterated the company's June statement, which said that Disney anticipated getting the necessary regulatory filings from global markets within six to 12 months, and added: "We don't intend to update that at all.”
Earlier this week, Disney
offered unspecified concessions to the European Commission in an effort to forestall potential antitrust concerns from the block. Were China to attempt to waylay the deal, Disney's only good option would be to attempt to negotiate; whether Beijing would be receptive to concessions, given the geopolitical backdrop, is far from clear.
It's also difficult to see what concessions Disney could conceivably offer that would satisfy Beijing, given that objections will likely be limited to film imports into China.
"What could they seek for Disney...unless they were to say, 'Don't acquire the Fox library and let us limit the number of English-language films you produce for import?'" asks Stephen Saltzman, an attorney at Paul Hastings who has represented Chinese state-owned entities in dealings with Hollywood. "It's really a stretch to see what could actually be relevant to the antitrust concerns of the Chinese marketplace that isn't somewhat ludicrous."
The personal relationships and politics at play in China's Disney-Fox calculus betray a similarly tangled mix of priorities. Disney and CEO Bob Iger have done more to cultivate ties with China than any other international media company, notably the two decades' worth of courtship that culminated in the launch of the Shanghai Disney Resort in 2016.
Around that time Chinese President Xi Jinping even
welcomed Iger for a meeting inside China's Great Hall of the People, the ceremonial seat of the country's legislature — an exceedingly rare honor for a non-head of state.
The Chinese no doubt are aware that the Disney chairman's staunch Democratic leanings make him far from one of Trump's favorite business figures. Yet, they also know that Fox executive co-chairman Rupert Murdoch is precisely that — a close confidant and frequent late-night Trump interlocutor by telephone. Murdoch even received a congratulatory ring from the president as soon as the Disney deal was unveiled last December, with White House press secretary Sarah Huckabee Sanders later saying that Trump viewed the acquisition as a "great thing for jobs."
Breaking up Murdoch's deal of a lifetime would thus be viewed "almost as a direct attack on Trump," Rosen says. The action would also strengthen the position of the China hawks within the administration — advisers Peter Navarro, Robert Lighthizer and Stephen Miller — who have argued for a structural delinking of the U.S. and China, and who remain on the lookout for any evidence of “interference in American affairs.”
Whether China is ready to go that far remains to be seen. Just this week, the White House again upped the stakes, though, announcing Wednesday that it would begin more aggressively policing foreign investment in the U.S. to prevent China from gaining access to American technology.
Adds Lee: "Beijing appears to be evaluating all possible options and waiting to see what is an appropriate way to respond if and when the next Trump trade action aimed at China arrives."
