President Trump warned more than a year ago that he would do all he could to prevent AT&T Inc. (T - Get Report) from acquiring Time Warner (TWX) in a $85.4 billion acquisition that would combine the country's largest pay-TV provider with the owner of HBO, Warner Bros. film studio and CNN.
On Monday, Nov. 20, Trump carried through on his pledge as the Department of Justice's antitrust division sued AT&T in U.S. District Court to prevent the acquisition from going forward. In response, AT&T CEO Randall Stephenson called a press conference to assert that his company would prevail in court, though he was quick to add that AT&T is open to a solution that would allow the deal to win regulatory approval.
"The best legal minds in the country agreed this transaction would be approved since we don't even compete with each other," Stephenson said. "This defies logic, and it is unprecedented."
Anticipating the lawsuit, Time Warner shares fell 1.1% to close at $87.71. AT&T was little changed at $34.64. In after-hours trading as of 6:30 p.m. ET, Time Warner stock was rising slightly and AT&T had dropped by less than 1%.
The DoJ has maintained that its decision to sue Dallas-based AT&T is rooted in antitrust law, rejecting claims that its recently appointed antitrust chief Makan Delrahim was influenced by Trump's long-running war of words with Time Warner's CNN. DoJ officials have rejected assertions that politics rather than antitrust law would influence the department decision to sue AT&T to block the deal.
Earlier this month, reports emerged that the DoJ had told AT&T officials that if it hoped to win regulatory approval the company would need to divest either Turner Broadcasting, which includes CNN, TBS and TNT, or DirecTV, the satellite TV operator it acquired in 2014. As he has said in recent weeks, Stephenson on Monday reiterated that he wouldn't sell CNN to close the deal.
At the root of DoJ's case is the argument that a combined AT&T-Time Warner would hold too great a sway over popular parts of the entertainment industry. And in fact, Trump said as much more than a year ago. "We will not approve this in my admin because it's too much concentration of power in the hands of too few," he said less than a month before the presidential election.
In response, Stephenson declared that AT&T remained intent upon retaining all of the two companies' businesses. "We do not believe that the divestiture of any AT&T asset or Time Warner asset is required by the law," he said.
If a settlement cannot be reached, the DoJ is likely to argue in court that the combined company could force other pay-TV distributors to pay higher fees to carry HBO, TNT or Warner Bros films. The result would be higher subscription fees for consumers and a higher bar for new distribution entrants.
The AT&T-Time Warner merger comes as subscribers to pay-TV platforms has accelerated in the nearly 14 months since the transaction was announced. By owning Time Warner's content, AT&T stands to draw higher profits from services such as DirecTV Now, its subscription streaming service. Similarly, Time Warner is better able to leverage its own content by making its networks and films available through streaming services owned by AT&T.
But the department has argued that a merged AT&T-Time Warner could favor its own nationwide distribution network, DirecTV, over that of a regional distributor such as Comcast Corp. (CMCSA - Get Report) or Charter Communications Inc. (CHTR - Get Report) . Unlike AT&T's proposed acquisition of Time Warner, the DoJ underscored that Comcast's acquisition of NBCUniversal in 2011 combined a content company with a broadband network owner covering only about 30% of U.S. households.
On Monday, Stephenson reiterated that his company wouldn't withdraw his company's proposed acquisition of Time Warner. Facing a DoJ lawsuit, Comcast dropped its proposed acquisition of Time Warner Cable in 2015.
At the root of AT&T's argument in favor of the merger is the notion that the deal would constitute a so-called "vertical merger," whereby a distribution company (AT&T) buys a content company (Time Warner.) As he did on Monday, Stephenson often declared that the DoJ hadn't rejected a vertical merger in some 40 years. DoJ officials have said that is incorrect.
"Today's DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent," said AT&T General Counsel David R. McAtee II in a statement, adding that the merger "will help make television more affordable, innovative, interactive and mobile. Fortunately, the Department of Justice doesn't have the final say in this matter."
Though the DoJ's case focused on the potential that a combined AT&T-Time Warner would hurt consumers and discourage competition, the specter of politics is sure to hang heavily over the court proceedings and media coverage. Trump has sparred with CNN ever since he announced his candidacy for president in July 2015. As a candidate and as president, Trump has often singled out the network for what he often labels "fake news" and what media experts say is simply journalism. The DoJ has said that the White House didn't influence its decision to sue AT&T.
Consumer advocates, though, applauded the decision, countering that the focus on CNN was a distraction, and that the DoJ should be commended for opposing a merger that stands to raise the prices for entertainment while making it harder for new distribution platforms to emerge.
On Oct. 22, 2016, Trump all but telegraphed what his DoJ might do if faced with ruling on this very transaction. "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," he said.
Andrew Jay Schwartzman, a longtime public interest attorney and counselor at Georgetown University Law School's Institute for Public Representation, all but echoed those sentiments.
"This case was investigated and drafted by dedicated civil servants who are prepared to show that AT&T would be able to use Time Warner's content properties to stifle competition in video programming and wireless markets," Schwartzman said. "It is an insult to the career attorneys in the Justice Department to suggest that the decision to bring this suit was not based on the merits of the case. AT&T and its PR team have shrewdly exploited the President's evident distaste for CNN to obtain sympathetic coverage from many journalists who are unfamiliar with antitrust law."
Daniel M. Petrocelli, the well-known court attorney from O'Melveny & Myers who was hired a year ago to lead AT&T's regulatory efforts, said the company will be ready to go to trial in as little as 60 days.
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