AT&T Sued by U.S. Seeking to Block Merger With Time Warner

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Attorney General Jeff Sessions speaks at the Justice Department in September.
Attorney General Jeff Sessions speaks at the Justice Department in September. Credit: Andrew Harrer/Bloomberg

The Justice Department has sued to block AT&T's $85.4 billion takeover of Time Warner, delivering a major blow to the carrier's bid to create a media and telecommunications empire.

"This merger would greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy," said Makan Delrahim, the head of the department's antitrust division.

The lawsuit takes the storm of controversy surrounding the deal to a new level—a courtroom—where the Justice Department will make its case for why the combination harms competition and ask a judge to block the tie-up. It marks the first time in several decades that the Justice Department has sued to block a merger between two companies that aren't direct competitors, also known as a vertical deal.

"Today's DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent," AT&T said in a statement. "We are confident that the Court will reject the Government's claims and permit this merger under longstanding legal precedent.""

A representative for Time Warner couldn't immediately be reached for comment.

The challenge threatens a deal that had appeared to be sailing toward approval as recently as a month ago. That was before Delrahim took up his position and took over the investigation. The parties continued to talk as recently as last week. During negotiations he pushed for the companies to sell the Turner broadcasting unit or DirecTV, a request that AT&T rejected.

Legal ground

U.S. antitrust officials, who have blocked many tie-ups between direct competitors, rarely step in to stop so-called vertical deals like the Time Warner takeover, which unites a distributor and supplier. Vertical deals are often viewed as pro-competitive, which has prompted some observers to predict Delrahim is venturing onto shaky legal ground. When enforcers have challenged similar transactions, like Comcast Corp.'s purchase of NBC Universal, they have often negotiated behavioral conditions that set requirements for how a company conducts business.

Delrahim, however, doesn't favor behavioral fixes, saying that they turn law enforcers into regulators.

"Instead of protecting the competition that might be lost in an unlawful merger, a behavioral remedy supplants competition with regulation," Delrahim said Thursday in a speech in Washington.

President Donald Trump's repeated bashing of CNN as fake news and criticism of the deal as being anti-competitive has sparked a chorus of accusations that the suit is politically motivated.

Trump spokeswoman Sarah Huckabee Sanders said Monday she's "not aware of any specific action taken by the White House" related to the lawsuit.

Court fight

AT&T is bound to put up a ferocious fight in court and may try to find out whether the White House influenced the Justice Department decision. In the event of a trial, AT&T intends to seek court permission for access to communications between the White House and the Justice Department about the takeover.

Blocking the deal will ultimately be up to a federal court judge, who will weigh the government's case against AT&T's claim that the acquisition will benefit consumers. The two sides could still negotiate a settlement that would allow the tie-up to move forward.

While AT&T can go to court to fight for the deal, a defeat would be a major setback to the media makeover strategy of the company, which is contending with stalling growth in wireless and TV. A rejection could also slam the brakes on further consolidation in the media and telecommunications industry.

The lawsuit marks the second time in six years that AT&T CEO Randall Stephenson has found himself facing government opposition in Washington over a deal. In 2011, AT&T dropped its $39 billion bid to acquire T-Mobile U.S. after the Justice Department sued to block that merger and the Federal Communications Commission said the tie-up wasn't in the public interest. Stephenson kept his job but received a $2.08 million pay cut that year for failing to successfully complete the deal.

Media landscape

The proposed Time Warner purchase is a move by Stephenson to expand into media and entertainment as his company's wireless, internet and pay-TV services businesses mature. Gaining premium cable channel HBO, CNN and the Warner Bros. studio would make AT&T a media and distribution powerhouse with combined revenue of $192 billion and an arsenal of news and entertainment properties including "Game of Thrones" and "Wonder Woman."

The takeover is part of a trend of megadeals sweeping across industry lines like Comcast's $3.8 billion purchase of DreamWorks Animation and the cable giant's plunge into TV programming with the NBC Universal. Verizon Communications, AT&T's closest peer, has opted to buy online properties like AOL and Yahoo in an attempt to expand beyond its slow-growing mobile service.

The AT&T-Time Warner combination doesn't reduce the number of news outlets since it only shifts ownership of CNN from one company to another. CNN's main competitors are MSNBC, owned by Comcast Corp., and Fox News, which is owned by Rupert Murdoch's 21st Century Fox.

AT&T's scale, with national wireless and pay-TV networks, is one reason its deal has drawn even more scrutiny. A trial may reveal whether CNN's coverage of Trump was another reason. Attorney General Jeff Sessions was asked during a Nov. 14 House hearing whether anyone from the White House contacted the Justice Department to interfere with or discuss the AT&T deal.

But it wasn't just Trump who criticized the deal. Democratic lawmakers including Senator Al Franken of Minnesota and Senator Elizabeth Warren of Massachusetts told Sessions in June that the merger would lead to higher prices, fewer choices and worse service for consumers.

Sessions said he was unable to comment on "conversations or communications that Department of Justice top people have with top people in the White House."

While it isn't illegal for Trump to make his views known to the Justice Department, the White House has traditionally stayed at arm's length from merger reviews. Trump told reporters during his recent trip to Asia that the deal might be challenged in court.

"I do feel that you should have as many news outlets as you can, especially since so many of them are fake," Trump said. "This way, at least you can get your word out. But I do believe you should have as many news outlets as you can."

— Bloomberg News

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