WASHINGTON — If the Justice Department challenges AT&T’s proposed merger with Time Warner in court, the legal question will be, on what grounds?
Politically, though, the focus is likely to be on the role of President Donald Trump.
Trump routinely attacks one of the crown jewels of the transaction, Time Warner-owned CNN, and for months there have been concerns and speculation that the White House would use the transaction as a way to punish the network.
The DOJ met with AT&T officials earlier this week and told them that they needed to divest the Turner Networks, which include CNN, Turner Classic Movies, and TBS, for the deal to proceed, according to a source familiar with the negotiations. There were also reports that the DOJ told AT&T that it could instead sell DirecTV to secure approval.
AT&T has argued that the transaction is the type of vertical merger that hasn’t traditionally raised antitrust red flags, but its CFO on Wednesday acknowledged that the timeline for the deal’s closing is “now uncertain.”
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Randall Stephenson, the CEO of AT&T, denied that the company was entertaining the idea of selling CNN or offered to do so. CNN quoted an unnamed DOJ official who said that the offer was made.
“Throughout this process, I have never offered to sell CNN and have no intention of doing so,” Stephenson said on Wednesday.
The latest news came as a surprise to many legal observers and even public interest advocates who, while opposed to the transaction, haven’t expected it to be blocked.
“There is no legal case here for the DOJ to make that either with or without the Turner networks, this transaction violates antitrust law,” said Larry Downes, project director at Georgetown’s Center for Business and Public Policy. “It is a very strange move, and one that from a legal standpoint doesn’t make any sense.”
Craig Aaron, the president and CEO of Free Press, which opposes the merger, said that while the divestitures could soften the merger’s consumer harms, “no matter where you come down on this merger, everyone should agree that the government shouldn’t base antitrust decisions or FCC rulings on whether it likes CNN’s coverage.”
Sen. Al Franken (D-Minn.), who also opposes the merger, said that “Any indication that this administration is using its power to weaken media organizations it doesn’t like would be a profoundly disturbing development.”
During the summer, the New York Times reported that an unnamed White House official viewed the pending merger as a way to extract “leverage” over CNN.
That led to a number of Senate Democrats, including Sen. Amy Klobuchar (D-Minn.), to fire off letters to Attorney General Jeff Sessions and to Trump, expressing concerns of political interference in the antitrust review. On CNN’s “Reliable Sources” on Sunday, Kellyanne Conway, Trump’s White House counselor, was asked about whether Trump was involved in the review of the transaction and said, “We’re not going to interfere with that here.”
The White House issued a statement denying that Trump talked to Sessions about the merger, and that no White House official was authorized to speak to the Justice Department on the transaction. Makan Delrahim, the chief of the Justice Department’s antitrust division, said that he has “never been instructed by the White House on this or any other transaction under review by the antirust division.”
During the campaign Trump said that his administration would not approve the merger, citing AT&T’s potential ownership of CNN, and because “it’s too much concentration of power in the hands of too few.”
Since then, though, the thinking on Wall Street has been that the merger would secure approval, despite the campaign rhetoric.
Before his appointment, Delrahim said that he didn’t see any antitrust problems with the transaction.
But that has changed.
That’s why some Wall Street analysts are puzzled over the latest development in the DOJ’s review. Amy Yong, an analyst with Macquarie Securities, said that even if AT&T shed the Turner cable networks, the structure of the deal would still remain the same.
“You never know,” she said. “Politics is difficult to handicap. Because this is a closed book, it is really hard to gauge any direction on what is going on behind closed doors, and I think that is the issue.”
Downes said that there has not been a successful legal challenge to a vertical merger — the category of the AT&T-Time Warner transaction — since the 1970s. Instead, the DOJ tends to challenge horizontal transactions that remove competition from the marketplace.
Others believe that the Justice Department is hardly out of bounds in raising the idea of shedding assets. A number of public interest advocates have argued that the combined company would have the incentive to withhold its cable channels from rival platforms. There have been concerns over AT&T’s offering of DirecTV streaming to its wireless subscribers without it counting toward data caps.
Diana Moss, the president of the American Antitrust Institute, said that she “read this purely as the DOJ having identified serious enough vertical competitive concerns with the AT&T-Time Warner merger that they are requiring a structural remedy (e.g., divestiture).” When the deal was announced, there were already concerns about the ability of the bulked-up company to gain an advantage in the marketplace, particularly when it comes to programming for AT&T’s wireless services.
Rivals have met privately with Justice Department officials to privately air their take on the transaction, and during the summer, Starz released an economic analysis of the transaction that warned of a “significant likelihood that the merged firm would have both the incentive and the ability to foreclose HBO’s primary competitors, Starz and Showtime, from access to AT&T’s subscribers.”
Dan Birk, partner at Eimer Stahl LLP, which focuses on antitrust litigation, said that the laws that prohibit mergers that could be anticompetitive are “fairly broad” and that “markets can be narrowly defined to all sorts of things.” He also noted that although this is a vertical merger, there may be aspects to the deal that have the impact of eliminating competition.
“It is not unusual for [the government] to define what they should be divesting,” he said.
He added, “It is not unusual at all in the context of transactions generally. Most large transactions that do involve some competitive effects end up being cleared by some sort of divestiture.”
In this case, though, there is the possibility of a long, protracted public court battle, one that will be a contrast to the way that the merger has faced government scrutiny so far, which is to say very much in private.
