The Justice Department has called on AT&T and Time Warner to sell Turner Broadcasting, Time Warner's group of cable channels that includes CNN, as a potential requirement for approving the companies' pending $85.4 billion deal, people briefed on the matter said Wednesday.
The other possible way for the merger to win approval would be for AT&T to sell its DirecTV division, two of these people added.
Antitrust officials and AT&T have discussed the Turner Broadcasting sell-off, three people briefed on the matter said Wednesday.
But they gave contradictory accounts over who first proposed shedding the Turner assets. Two of the sources said AT&T had volunteered the idea -- and that the Justice Department had flatly rejected the proposal. The other said the idea came from the Justice Department. All three people spoke on condition of anonymity to discuss the private negotiations freely.
The government's demands set up a potential battle over the fate of the long-in-the-works deal that would create a colossus straddling the worlds of media and telecommunications at a time when upstarts like Netflix are disrupting traditional players in both industries.
As originally envisioned, combining AT&T and Time Warner would yield a giant company offering wireless and broadband Internet service, DirecTV, the Warner Bros. movie studio and cable channels like HBO and CNN.
If the Justice Department formally makes either demand a requisite for approval, AT&T and Time Warner would almost certainly take the matter to court to challenge the government's legal basis for blocking the transaction.
President Donald Trump has long accused CNN of harboring a bias against him.
Separately, Trump has criticized the proposed merger from a populist perspective. In the final weeks of the presidential campaign, he argued that "deals like this destroy democracy" and cited it as "an example of the power structure" that he was fighting.
While critics of the merger have described it as a sign that there is too much consolidation in the media and telecommunications industries, analysts have said that there were few legal grounds on which to block the transaction.
At an investor conference on Wednesday, John Stephens, AT&T's chief financial officer, said that the timing of the deal's closing, which had been scheduled by year's end, was now uncertain. The only remaining issue to be resolved, he added, was Justice Department approval.
"We are in active discussions with the [Department of Justice]," Stephens said. "I cannot comment on those discussions. But with those discussions, I can now say that the timing of the closing of the deal is now uncertain."
Time Warner Cable shares dropped $6.16, or 6.5 percent, to $88.50 on Wednesday and AT&T rose 37 cents, or 1.1 percent, to $33.44.
Executives at AT&T and Time Warner have privately expressed bewilderment about the request from the Justice Department. Because the proposed deal is a "vertical" merger -- meaning that the companies don't compete directly with each other -- they believe there is little legal basis to block it.
To win approval of the deal, AT&T hired lobbyists close to Vice President Mike Pence and others in the Trump administration. AT&T was among the top donors to Trump's inauguration.
AT&T's chief executive, Randall Stephenson, had attended at least two meetings with Trump this year. Shortly after the first one, Trump lashed out at CNN on Twitter, saying of the news network that "their credibility will soon be gone!" After the second meeting, which was focused on emerging technologies, the president said that Stephenson was doing "really a top job."
Fighting the deal could prove challenging for regulators, antitrust experts said. The Justice Department would have to argue that AT&T would have an incentive to withhold Turner channels like CNN or its NBA on TNT from rival broadband distributors like Verizon or Comcast. It could also try to demonstrate that AT&T would give CNN or TNT preferential treatment, making it difficult for competitors such as Fox News or ESPN to reach AT&T customers.
To block the deal, Justice Department lawyers would have to show that these effects would hurt consumers in the form of higher prices or fewer choices, antitrust lawyers said.
"Because this is a vertical merger that combines distribution with content, the [Justice Department] would have to show that a combined entity has the incentive as a vertically integrated company to foreclose rival content producers and/or rival distributors from access to content," Diana Moss, president of the American Antitrust Institute, said.
The biggest counterweight to such an argument is the 2011 approval by President Barack Obama's administration of Comcast's acquisition of NBC Universal. In that case, the Justice Department and Federal Communications Commission attached several conditions to Comcast's business practices, including promises that Comcast would not withhold content from rival streaming services.
Such conditions, known as behavioral remedies, have been typical in vertical mergers. The Justice Department's demand for divestitures would be a major change in antitrust policy, experts said.
Halting the deal between AT&T and Time Warner would require regulators to prove that previous mergers had resulted in worse service for consumers and that shedding assets would be better than behavioral remedies.
Spokesmen for AT&T and Time Warner declined to comment. A Justice Department representative declined to comment.
Information for this article was contributed by Michael J. de la Merced, Emily Steel and Andrew Ross Sorkin of The New York Times.
Business on 11/09/2017