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This is what Justice Department action on AT&T, Time Warner means for stocks

Key Points
  • The Justice Department's lawsuit and objections to the AT&T, Time Warner deal is not likely to hit the broader stock market, but it may put a chill on media stocks.
  • The DOJ says the merger will stifle competition and send up prices.
  • AT&T CEO Randall Stephenson said the companies do not know if the deal was challenged because of cable news network CNN, but the companies refuse to divest of that asset.
  • If the Justice Department begins to sue on other mergers in different sectors, the stock market could react negatively.
DOJ argues AT&T-Time Warner deal would harm competition and thwart innovation

The Justice Department's suit against the AT&T's $85 billion merger with Time Warner is not likely to have a broad impact on the stock market, but it could chill activity in the media sector, analysts say.

The companies said they would fight the lawsuit, which is unusual in that it seeks to halt a vertical merger, meaning the businesses do not directly overlap but do complement each other. The Department of Justice will now have to prove that the combination would be harmful.

"It's not totally shocking. It didn't come completely out of left field," said James Paulsen, chief investment strategist at Leuthold Group. "It is odd in the sense for the market to be dealing in deregulatory environment under a Republican administration and under a Republican-controlled Congress to have this come out. It's just a little odd. It makes you wonder where you really are on the regulatory front."

Analysts say the focus on the AT&T, Time Warner deal raises questions about the 21st Century Fox's efforts to sell off its assets, such as its film or television studios. Interested buyers reportedly include Comcast, parent of CNBC, and Disney.

Paulsen said the stock market could respond negatively if it appears that the administration is becoming more aggressive against mergers in general, but for now it's likely to be contained. "This certainly puts a wet blanket over media deals," said Paulsen.

Peter Boockvar, chief market analyst at Lindsey Group, said the market has been ignoring negative news on the deal.

"It's a weird time. I'm of the belief the stock market is not the same discounting mechanism it was," he said. "Unless the worry is smack in the middle of their face they don't care. They are thinking about tax reform and everything else pales in comparison… Even if it's a 2018 passage…they're staring at that 20 percent corporate tax rate and they're drooling."

Paulsen said the DOJ focus on AT&T and Time Warner may be a one off. He said it does raise questions about whether the deal is getting attention because President Donald Trump has said he opposed the deal and because of his sparring on Twitter with Time Warner's cable news network, CNN. As a candidate, Trump said his administration would reject the deal because it put too much power in too few hands.

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

AT&T CEO Randall Stephenson told reporters Monday that he has never disagreed so much with the DOJ over basic facts on a deal. The CEO said he did not know whether the objections are about CNN, and that that the companies would not agree to divest the cable news network or give any appearance of compromising the First Amendment.

The Justice Department said the deal harms consumers and stifles innovation. Earlier this month, there were reports that the government had demanded AT&T sell Turner Broadcasting, the operator of CNN, or AT&T's DirectTV as a condition of approval, but the government has pushed back on those reports.

The government also has tried to get state attorneys general to join tis suit but so far none have signed on.

"Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitors from the market. We see no legitimate reason for our merger to be treated differently," said AT&T general counsel David McAtee ,in a statement.

Craig Moffett, founder and analyst with MoffettNathanson, said there are reasons Justice could go after the merger.

"I don't think it's fair to say it's either political or there are no vertical issues because there are," he said. AT&T would have leverage against its competitors by owning such programming companies as HBO.

"Perhaps the president approached the DOJ, but let's assume that's not the case," said Moffett. "Here's the reason where it actually could raise prices for consumers. Seventy percent of the country consumes Time Warner content through some platform other than AT&T, and as long as AT&T becomes a supplier to its direct competitors, it has an incentive to raise the price to its direct competitors."