Barring a settlement, the Department of Justice lawsuit to block AT&T Inc.'s (T) purchase of Time Warner Inc. (TWX) is a blockbuster that will resonate throughout the media business.

The outcome will signal whether the courts will allow vertical consolidation of leading media production and distribution companies. For President Trump, quashing the deal would be a victory against nemesis CNN, which is part of Time Warner.

Opening statements begin March 21 in the U.S. District Court for the District of Columbia. The court scheduled three weeks for the proceeding.

Here's what you need to know.

Why Is the Government Suing AT&T?

The Department of Justice's November lawsuit argues that AT&T and Time Warner are likely to abuse their power in content production and distribution, and charge competitors to DirecTV more for Turner Networks channels such as CNN, TBS and TNT. Consumers would pay the price through higher bills for cable or streaming service.

Post-merger AT&T could also stop rivals from providing free HBO to gain subscribers, the government argues.

In a new twist, Justice suggested in March pleadings that AT&T and Comcast (CMCSA) would likely work together "either by overt collusion or implicit understanding" to restrict access to Turner and NBCUniversal, respectively.

What Do AT&T and Time Warner Say?

The merger partners say the deal will allow them to compete with Netflix Inc. (NFLX) , Amazon.com Inc. (AMZN) and Alphabet Inc.'s (GOOGL) Google and YouTube, and will benefit consumers. Advertising technology will allow it to shift costs from consumers to advertisers, AT&T and Time Warner say. 

AT&T and Time Warner note that even by the government's estimates--which they question--consumers would pay just 45 cents more per month in their cable bills.

The companies outlined an arbitration system in March that it said would ensure that rival video providers will be able to purchase content from CNN, TBS, TNT and HBO. The merger partners say the arbitration system is "fatal" to the government's arguments.

Who is hearing the case?

U.S. District Judge Richard Leon, an appointee of George W. Bush, presides. Leon is well versed in the closest precedent, the 2011 merger of Comcast and NBCUniversal, having approved the deal concessions that Justice negotiated with the merger partners. Leon had reservations about the impact of the Comcast-NBC merger on online video distributors and had a number of questions about arbitration between the company and other video providers. It will be interesting to see what he makes of AT&T's arbitration proposal.

What Has Happened So Far?

Leon recently gave AT&T and Time Warner permission to discuss their arbitration plans in the trial. Justice argued that the matter is a sideshow to the question of whether the merger is legal.

The government scored some points in February, however, when Leon ruled that the White House will not have to turn over all records of communications regarding the lawsuit with the Department of Justice.

Leon rejected a request from by former U.S. Attorney for the Southern District of New York Preet Bharara and 10 other former Department of Justice officials who urged the court to look into whether Trump influenced the case.

How Do Politics Play Into This?

President Trump's animosity towards Time Warner's CNN is well documented. On the day that AT&T and Time Warner announced their merger in 2016, then-candidate Trump said in a campaign speech that he would reject the transaction because it would concentrate too much power in one company.

Many, like the DoJ veterans who sought answers about White House involvement, are dubious that politics is not behind the lawsuit. A group of senior Democrats in the House of Representatives sent a letter to Attorney General Jeff Sessions asking for documents and emails related to the suit in February, citing Trump's "manifest hatred" of CNN.

Before his appointment, Justice antitrust chief Makan Delrahim told Canadian news organization BNN that he did not see a "major antitrust problem" with the merger. In testimony to Congress he said that his department would be "free of political influence."

If Comcast Could Buy NBCUniversal, Why Can't AT&T Buy Time Warner?

Good question. Like Comcast's purchase of NBCUniversal, AT&T's acquisition of Time Warner would combine a massive pay-TV network (DirecTV) with film and television production (Warner Bros., HBO and Turner's networks). DirecTV's satellite-TV network has national coverage while Comcast's cable and broadband networks are regional. 

AT&T accused Justice of selective enforcement of antitrust laws. Judge Leon noted in a February order that the government did require concessions of Comcast, and that the government has taken issue with other vertical deals. "So while it may, indeed, be a rare breed of horse, it is not exactly a unicorn!" Leon wrote of the government's antitrust case.

Where Does the FCC Stand?

FCC Commission Ajit Pai said last year that he would not review the merger because it does not involve the sale of government-issued licenses. Time Warner sold independent Atlanta TV station WPCH (it's only station) to Meredith Corp. for $70 million last year, likely to avoid license transfers that would cause the FCC to look at the deal.

Jim Cramer and the AAP team hold positions in Comcast, Amazon and Alphabet for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells CMCSA, AMZN or GOOGL? Learn more now.

Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

 

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