Deals and IPOs

Justice Department calls AT&T deal for Time Warner 'illegal' and 'harmful' to consumers

Key Points
  • Justice Department says the combination would stifle competition and innovation and raise prices for consumers.
  • AT&T says it sees no reason for its merger to be treated differently than other vertical mergers and decades of antitrust precedent.
  • AT&T and Time Warner announced their $85 billion merger last year but the closing has been dragged out by the government's antitrust review.
Faber on DOJ blocking AT&T/Time Warner merger: DOJ officials are confident they will prevail in court

The Justice Department sued on Monday to block AT&T's merger with Time Warner, calling it an "illegal" combination that harms consumers and stifles innovation, DOJ officials said.

AT&T and Time Warner announced their $85 billion merger last year, but the closing has been dragged out by the government's antitrust review.

It is the latest salvo in a drama more than one year in the making. Earlier this month, reports circulated that the government had demanded AT&T sell Turner Broadcasting, operator of the CNN news network, or DirectTV as a condition of approval, though the government pushed back at those reports.

Chairman and Chief Executive Officer of Time Warner Jeffrey Bewkes (L) speaks with Chairman and Chief Executive Officer of AT&T Randall Stephenson before a Senate Judiciary Committee Antitrust Subcommittee hearing on the proposed deal between AT&T and Time Warner in Washington, U.S., December 7, 2016.
Joshua Roberts | Reuters

A Justice Department official told reporters on Monday that the merger would raise prices for consumers and potentially block creators of media content from distributing their product without paying more money. Time Warner owns various networks in addition to CNN, including TBS, TNT and Cartoon Network. It also has lucrative sports broadcasting deals.

The government was also working to get state attorneys general to support a lawsuit, but so far none has signed on, the Justice official said on Monday.

In a statement on Monday, AT&T's general counsel, David McAtee, said, "Today's DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent. Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently."

The lawsuit says the merged company would have the power to make its video distributor rivals less competitive by raising their costs, which would be passed on to consumers. The merged firm could also hinder the growth of online distributors that it sees as a threat to the pay-TV model.

But AT&T's CEO, Randall Stephenson, said during a press conference late Monday the government's argument "defies logic."

The case was filed in a D.C. federal court under the direction of the Justice Department's newly installed antitrust chief, Makan Delrahim. He was only recently confirmed by the Senate and seemed to signal his intentions last week in a speech at the National Press Club in Washington.

Delrahim was critical of the attempts of prior administrations to make "behavioral remedies" conditions to approve of big corporate mergers. Such remedies are supposed to create fairness and protect consumers but create extra burdens on regulators, he said.

The Justice Department has disputed it made the sale of Turner Broadcasting or CNN a condition of approval. A Justice Department official said Monday that the government made a "good faith" effort to resolve the harm to competition while allowing significant parts of the deal to move forward.

Stephenson said during the press conference that a sale of CNN was a "nonstarter," adding that the company was confident it would not have to sell any assets.

Traders have said in recent days that a government move to block the deal could put a chill on merger activity. So far this year, there have been more than 9,000 mergers announced in the U.S., worth an estimated $1.2 trillion, according to Dealogic. Within the U.S. media sector, there have been 209 deals announced this year for an estimated $32 billion.

What's missing this year, however, traders said, were the huge deals that characterized 2016.

While the merger market seemed to awaken since Labor Day, "this could kill it again," said Nancy Havens, an event-driven trader who takes bets on stocks of companies before they complete their deals, about Delrahim's stance. "It makes the future antitrust approval of mergers much more difficult."

AT&T's Stephenson said as much on the conference call. The lawsuit would have "nothing but a freezing effect on commerce."

Justice officials were seen as headed to a lawsuit no matter what. But Delrahim, who has lobbied on behalf of AT&T in the distant past, said in an interview on Canadian television last year he didn't see the deal as having a major antitrust problem.

Last year the Justice Department under the Obama administration teamed up with 11 states to challenge Anthem's $54 billion acquisition of Cigna, and with eight states to block Aetna's $37 billion of Humana. Both deals were canceled earlier this year.

'Highly predictable' for DOJ to litigate AT&T/Time Warner merger: Haverty