Time Warner Inc. (TWX) stock was tumbling on Thursday, Nov. 2, following a report that the Department of Justice may sue the owner of HBO, Warner Bros. Entertainment and CNN along with its merger partner AT&T Inc. (T) if the two companies reject certain antitrust conditions tied to their proposed $85.4 billion transaction. 

The Justice Department is considering a lawsuit to block the deal between AT&T and Time Warner even as regulators continue to discuss possible concessions with officials at both companies, The Wall Street Journal reported, citing people familiar with the matter.

The report splashed cold water on the notion that the DOJ was close to approving the merger. The news sent Time Warner shares down a whopping 4.5% to $93.96, its lowest level since January, while AT&T stock was off 1.2% to $33.16, near the 52-week low.

Under terms of the deal, Time Warner shareholders would receive more AT&T stock for each share of the company they own if the Dallas telecom provider's stock falls below $37.41 at the time of the closing. AT&T has traded at the low end of the so-called collar for weeks, with the drop on Thursday pushing the shares even lower.

As it stands, Time Warner shareholders would receive $107.50 per share under the terms of the deal announced a year ago. That translates into $53.75 per share in cash and an equivalent amount in AT&T stock. But the stock portion of the transaction is subject to a collar -- Time Warner shareholders receive 1.437 AT&T shares per Time Warner share if AT&T's average stock price falls below $37.411 at closing, or 1.3 AT&T shares if AT&T's average stock price is above $41.349 at closing.

AT&T sought to downplay the Journal story, asserting its conversations with the DoJ reflected the usual give-and-take associated with any large media transaction. As CEO Randall Stephenson has done ever since the deal was announced in October 2016, AT&T argued the transaction is a "vertical merger" combining a distribution company with a content creator. In April 2015, the DOJ famously rejected Comcast Corp.'s (CMCSA) proposed acquisition of Time Warner Cable, arguing the horizontal merger would have combined two dominant providers of internet and pay-TV services.  

"When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios," AT&T said in a statement. "For over 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market. While we won't comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception."

Time Warner declined to comment.

The likelihood that AT&T will ultimately receives regulator approval for the deal remains high, said Barclays media analyst Kannana Venkateshwar, given the recent history of approvals for transactions that can reasonably be argued qualify as vertical mergers. Barcalys called the dip in Time Warner's stock price a buying "opportunity." 

"If T-TWX cannot go through the DOJ under a Republican administration, it is tough to see how horizontal deals such as Sprint Corp. (S) --T-Mobile USA (TMUS) (covered by Amir Rozwadowski), or Dish Network Corp.  (DISH) - DTV would be allowed," Venkateshwar said in a Nov. 2 investor note.

Nonetheless, with Donald Trump as president, it's been more difficult to forecast how the Department of Justice might rule on AT&T's proposed takeover of Time Warner. Whereas Republican and Democratic administrations usually diverge in their willingness to approve mergers between two large similarly structured companies, Trump himself has brought politics into the mix.

Soon after the merger was announced, Trump said he would reject the deal, arguing it might allow CNN to get too big.

"As an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few," Trump said during a campaign speech in October 2016, shortly before the deal was announced. Trump was said to consider using the proposed merger as leverage against CNN, The New York Times reported in July.

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