U.S. Weighs Suit Against AT&T's Deal for Time Warner -- 2nd Update

By Brent Kendall and Drew FitzGerald Features Dow Jones Newswires

The Justice Department is laying the groundwork for a potential lawsuit challenging AT&T Inc.'s planned acquisition of Time Warner Inc. if the government and companies can't agree on a settlement, according to people familiar with the matter.

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The department's antitrust division is preparing for litigation in case it decides to sue to block the deal, these people said. Simultaneously, the department and the companies are discussing possible settlement terms that would lead to the deal winning government approval with conditions attached. The two sides, however, aren't yet close to an agreement, the people said.

The outcome could go either way and the timing of any decision remains uncertain, the people said.

Most outside observers have believed the deal, valued at $85 billion when it was announced last year, was likely headed for government approval. The recent developments aren't necessarily an indication that the deal is in trouble, but they do suggest more regulatory uncertainty for the companies than many analysts anticipated.

Shares of Time Warner were down 5.4% at $93.10 in late-morning trading. AT&T's shares were down 1.4% at $33.08 after spiking as high as $33.98 immediately after The Wall Street Journal reported a lawsuit was being considered.

"When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios," an AT&T spokesman said. "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."

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A Time Warner spokesman declined to comment.

AT&T executives have continued to say the deal is on track to close by the end of the year, with financing lined up and all government authorities on board except for the Justice Department.

A department spokesman declined to comment.

It isn't uncommon during major government merger investigations for antitrust officials to work on two tracks, one that prepares for litigation and another that works toward a settlement allowing the merger. The antitrust division in recent years has placed renewed emphasis on being ready for a lawsuit in case settlement talks break down.

If the Justice Department were to sue to block the deal, that wouldn't be the end of the matter unless the companies abandoned their plans. The department would have to present its case to a federal judge and prove that the deal would likely harm competition.

The department has spent a year investigating whether allowing AT&T to buy Time Warner would hurt competition in the media and telecommunications businesses.

The deal would combine AT&T's communications infrastructure, including its cable service and DirecTV satellite service, with Time Warner's broad media portfolio, which includes channels such as CNN, TBS and HBO as well as the Warner Bros. studios.

The company argues the deal would help consumers by making film and TV more affordable. AT&T points to its current moves to lower prices for video content, such as offering discounts for DirecTV Now, an online pay-TV service.

TV programmers are among those who voice concern about the deal, arguing that AT&T's reach -- more than 90 million wireless customers and 20 million satellite subscribers -- if added to control of some of the most sought-after programming, would greatly disadvantage rival media. Some consumer advocates argue that giving AT&T that much control over both content and its distribution could lead to higher prices and fewer options for viewers.

The Justice Department's antitrust review reached a new level in recent weeks after the Senate in late September confirmed Makan Delrahim to lead the Justice Department's antitrust division. President Donald Trump nominated Mr. Delrahim in April, but the Senate moved slowly on his confirmation, leaving him on the sidelines while other Justice Department antitrust staffers scrutinized the AT&T-Time Warner transaction. Mr. Delrahim is now involved in the deliberations, people familiar with the matter said.

AT&T officials have met with Justice Department officials in recent weeks, and the department separately has been talking to third parties who are concerned about the deal, such as some rival content providers, according to people familiar with the discussions.

It could be a challenge for the Justice Department to mount a case against the deal because the combination of AT&T and Time Warner is a so-called vertical merger, combining companies that represent different links of the supply chain.

Antitrust officials rarely sue to block vertical combinations outright, because they don't typically raise the same kinds of concerns as mergers of head-to-head competitors. The latter are easier to challenge, because it is easier to prove consumer harm when one company seeks to combine with another that has been a significant competitor.

The AT&T-Time Warner deal has some similarities to Comcast Corp.'s 2011 takeover of NBCUniversal, a deal the Justice Department allowed under the Obama administration after Comcast agreed to a range of restrictions on its future behavior. For example, Comcast agreed to make video content available to online competitors of Comcast's cable-television services.

Mr. Delrahim, however, isn't a big supporter of using so-called behavioral remedies to address concerns about a merger, as he stated last Friday in a public appearance at New York University. Antitrust observers took notice of the remarks and have wondered whether his views would make it harder for AT&T to offer concessions the Justice Department would find acceptable.

Conservative antitrust enforcers in general don't like behavioral remedies, on the theory that the Justice Department shouldn't be a regulator of future business conduct.

The more traditional way for merging companies to address government antitrust concerns is to sell off assets to competitors to ensure the market stays competitive. It isn't clear whether AT&T has offered any asset sales so far or whether the Justice Department has particular assets in mind that it would like AT&T to divest as a condition for government approval.

Hanging over the Justice Department's review are comments Mr. Trump made during last year's presidential campaign in which he said AT&T shouldn't be allowed to buy Time Warner because it would give too much power to one company. The remarks, part of the Trump campaign's populist message, were unusual because recent presidents and candidates generally haven't taken positions on specific mergers, and the Justice Department usually conducts merger reviews independent of political influence from the White House.

Democrats have expressed concern about Mr. Trump's potential influence, but some have simultaneously urged the Justice Department to block the AT&T deal.

During his confirmation process, Mr. Delrahim, who was a deputy White House counsel before being confirmed to the Justice Department post, told senators that the White House hasn't lobbied him on AT&T. At his confirmation hearing in May, he said that politics wouldn't play a role in his antitrust enforcement decisions.

Write to Brent Kendall at brent.kendall@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com

(END) Dow Jones Newswires

November 02, 2017 12:40 ET (16:40 GMT)