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Time Warner trading at deep discount to AT&T's offer as investors see regulatory hurdles

Time Warner was trading at about an 18 percent discount to AT&T's offer price, an unusually wide spread for a just-announced merger as investors have big doubts over whether regulators will approve the $85.4 billion combination of the wireless and content companies.

Under the terms of the deal, Time Warner shareholders will receive $53.75 per share in cash and $53.75 per share in AT&T stock for a total deal price of $107.50. Time Warner's stock was set to open actually lower from Friday's close at between $88 and $89 a share, according to premarket trading.

The stock jumped at the end of last week when reports of talks with AT&T emerged. On Wednesday before those reports, Time Warner shares closed at $79.24 a share.

AT&T shares traded more than 1 percent lower to below $36.88 in Monday morning trade, not as big of a decline that typically would be expected for an acquirer shelling out half-stock for a deal of this size. AT&T also said it would use new debt to finance some of the cash portion.

The stock portion of the deal is subject to a collar if AT&T trades above or below certain prices, which could further complicate things for traders trying to play this deal. For example, if AT&T's average price is below $37.4111 at the deal's closing, Time Warner shareholders will receive 1.437 AT&T shares instead of the set amount.

"We believe the deal will receive intense regulatory scrutiny by the FCC," wrote Jefferies analyst John Janedis in a note to clients after the deal was announced.

"Many pundits believe that the Comcast-NBCUniversal deal that was approved in March 2013 would not have been approved if it were to occur today, given a regulatory environment that appears more hostile. Looking ahead the likely new president may be less 'business friendly' going forward."

Republican candidate Donald Trump said over the weekend that he would block the deal. The Democratic candidate and leader in most polls, Hillary Clinton, has not yet commented on the deal personally, but her running mate Sen. Tim Kaine indicated some concerns about it on Sunday.

AT&T CEO Randall Stephenson tried to make clear Monday on CNBC that this deal has a better chance of gaining regulatory approval than currently believed because it is a "pure vertical integration" of content and distribution. He and Time Warner CEO Jeff Bewkes argued that consumers will have more choices after the deal.

AT&T has to pay $500 million if the deal gets blocked, according to The Wall Street Journal. Time Warner will pay a $1.7 billion breakup fee if a higher bidder comes in, according to the newspaper. The companies said in a press release they expect the deal to close before year-end 2017.

In 2014, Twenty-First Century Fox offered to buy Time Warner for $86 a share, but Bewkes ultimately rejected that deal.

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.