AT&T takeover of Time Warner hits snag with DOJ as dispute goes public

An AT&T store is seen on 5th Avenue in New York on October 23, 2016. AT&T unveiled a mega-deal for Time Warner that would transform the telecom giant into a media-entertainment powerhouse positioned for a sector facing major technology changes. The stock-and-cash deal is valued at $108.7 billion including debt, and gives a value of $84.5 billion to Time Warner -- a major name in the sector that includes the Warner Bros. studios in Hollywood and an array of TV assets such as HBO and CNN. / AFP / KENA BETANCUR (Photo credit should read KENA BETANCUR/AFP/Getty Images)

AT&T’s acquisition of Time Warner has hit a serious snag. Negotiations between the companies and the Department of Justice have turned so contentious that now both sides are arguing publicly over what the dispute is even about.

According to three sources with knowledge of the matter, the Department of Justice’s antitrust chief met with AT&T on Monday and offered a choice: If you want us to approve your purchase of Time Warner, either sell off CNN’s parent unit, Turner, or sell DirecTV. Otherwise, we’ll see you in court.

The question is what led to that. According to a DOJ source, the companies made an offer to put CNN up for sale in order to get the deal done. Another DOJ source said “the parties offered to divest CNN and the DOJ Antitrust Division flatly rejected it.”

Shortly after the DOJ put out that message, AT&T CEO Randall Stephenson sent out a statement denying it.

“Until now, we’ve never commented on our discussions with the DOJ. But given DOJ’s statement this afternoon, it’s important to set the record straight. Throughout this process, I have never offered to sell CNN and have no intention of doing so,” Stephenson said.

In a statement sent later Wednesday afternoon, a DOJ spokesperson said, “The Department is committed to carrying out its duties in accordance with the laws and the facts. Beyond that, the Department does not comment on any pending investigation.”

The back-and-forth sent Time Warner’s stock down 6.5%. And it caused some Democratic lawmakers to raise new concerns about White House interference in the Justice Department.

AT&T announced its acquisition of Time Warner more than a year ago. It has been waiting for the Justice Department’s blessing.

The wireless giant previously said that it expected the acquisition to take effect by the end of this year.

But AT&T now says the timing of the deal’s closing is “uncertain.”

“We are in active discussions with the DOJ,” John J. Stephens, chief financial officer for AT&T, said at a Wells Fargo conference Wednesday morning.

Hours later, the Financial Times and The New York Times reported that the DOJ was demanding the sale of CNN or Turner as a condition of approving the deal.

Such a demand would be highly unusual.

The reports effectively confirmed last week’s Wall Street Journal report that the government is “actively considering” an antitrust lawsuit to block the impending acquisition.

According to three sources who insisted on anonymity, two options were discussed at Monday’s meeting.

AT&T could either divest DirecTV, the satellite broadcaster that it purchased two years ago, or it could divest all of Turner, the unit of Time Warner that includes CNN.

“Threatening Turner is a fig leaf for threatening CNN,” one of the sources said.

AT&T is said to be reluctant to sell assets, especially Turner, which represents a significant portion of Time Warner’s profits.

As for DirecTV, “it’s a false choice,” one of the sources said, saying that the offer seemed designed to disguise an attempt to punish CNN.

That possibility has been a concern all year long.

The Justice Department’s hardline approach to AT&T — belying the business-friendly image of the Trump administration — has spurred questions about Trump’s personal interest in the deal.

As a candidate, President Trump publicly vowed to block the transaction. As president, he frequently criticizes CNN. Over the summer The New York Times reported that Trump aides discussed using the pending deal as a powerful form of leverage over CNN’s coverage.

“You have to wonder” about the behind-the-scenes machinations “given that Trump has a vendetta against CNN and has openly talked about using these types of deals to punish them,” Trevor Timm, the executive director of the Freedom of the Press Foundation, told CNN last week.

But the Justice Department has historically been insulated from political pressure.

The Journal story was an unwelcome surprise for AT&T executives. Transactions like Comcast’s acquisition of NBCUniversal in 2011 are routinely approved with conditions attached.

“For over 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market,” AT&T said last week. “While we won’t comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception.”

Stephens reiterated confidence in the deal at Wednesday’s Wells Fargo conference, saying “these types of mergers bring great benefit to customers and have very routinely been approved by the DOJ and the federal government.”

On last Sunday’s “Reliable Sources” on CNN, when asked whether Trump has had any involvement, counselor to the president Kellyanne Conway said “we’re not going to interfere with that here.”

When asked whether the president still personally opposes the AT&T-Time Warner deal, Conway said, “I haven’t discussed that with him lately.”

Trump was quoted criticizing the DOJ several times last week. He said he wants the department to investigate his political rivals, including Hillary Clinton.

AT&T and Time Warner agreed to the $85 billion deal last fall.