By Diane Bartz and David Shepardson
WASHINGTON (Reuters) – The U.S. Department of Justice sued AT&T Inc
The lawsuit is the first major challenge to a merger by the administration of U.S. President Donald Trump, who has repeatedly criticized Time Warner’s CNN news unit and announced his opposition to the deal before the election last year, saying it would concentrate too much power in AT&T’s hands.
The Justice Department is arguing that AT&T would use Time Warner’s films and movies to force rival pay-TV companies to pay “hundreds of millions of dollars more per year for Time Warner’s networks” in the lawsuit filed late Monday in federal court in Washington.
The government cited documents where AT&T and its satellite broadcast unit DirecTV described the traditional pay-TV model as a “cash cow” and “golden goose,” suggesting customers were at risk of price hikes.
The 23-page complaint also said the deal would slow the industry’s transition to online video and other new distribution models.
AT&T, which sees the deal as a way to compete against emerging technology companies such as Netflix Inc
AT&T head lawyer David McAtee said vertical mergers, between companies on different steps in a supply chain, are routinely approved.
“We see no legitimate reason for our merger to be treated differently,” said McAtee, adding that AT&T is confident a judge will reject the Justice Department’s case. The Obama administration approved a similar vertical deal in 2011 to allow cable company Comcast Corp
AT&T Inc is prepared to go to trial as soon as possible, lead trial counsel Daniel Petrocelli, a partner at O’Melveny & Myers, told reporters on Monday.
The legal challenge ramps up hostilities after AT&T rejected the Justice Department’s demand earlier this month to divest DirecTV or Time Warner’s Turner Broadcasting – which contains news network CNN – in order to win antitrust approval.
The move may be a sign that the Trump administration will look closely at other big mergers.
Time Warner’s shares dropped 1.1 percent to close at $87.71, while AT&T shares closed up 0.4 percent at $34.64.
The deal has been a political lightning rod since it was hatched in October 2016. During his campaign, Trump said that reporters covered him unfairly and has continued to attack CNN as president, which he has labeled as “fake news.” He has not commented on the AT&T deal since his inauguration in January.
U.S. Attorney General Jeff Sessions declined to say last week if anyone from the White House had discussed the merger with any Justice Department officials.
The No. 2 U.S. wireless carrier is trying to buy Time Warner, which also owns the premium channel HBO and movie studio Warner Bros, so it can bundle video entertainment on its mobile service.
The Justice Department’s lawsuit cited internal Time Warner documents that said long-term contracts to show live sporting events like college basketball and baseball would help allow it to achieve “targeted rate increases.”
The lawsuit also said AT&T and Comcast, which control almost half of the pay-TV market, “would have an increased incentive and ability to harm competition by impending online competitors they consider a threat.”
The complaint’s focus on raising the costs of DirecTV’s rivals and hampering the move to online video is consistent with normal antitrust concerns, said Henry Su, a partner in the law firm Constantine Cannon.
“The theories that are being espoused (in the complaint) are not out on the edge or untested theories. They’re espousing what we consider traditional theories of vertical harm,” said Su. “It doesn’t look like a stretch.”
Aside from Trump and the Justice Department, the deal is also opposed by an array of consumer groups and smaller television networks.
Senator Richard Blumenthal, a Connecticut Democrat, said he was pleased that the department was seeking to stop the merger but worried about White House interference in that decision.
“The Department of Justice can anticipate a tough battle, but it deserves support for the goal of protecting against undue power,” Blumenthal said in a statement.
“I remain appalled by President Trump’s attempts to weaponize antitrust law because he disagrees with CNN’s coverage, and I will continue to stand against any improper influence by the White House.”
Last week, the Justice Department had approached 18 state attorneys general asking them to join the challenge, but as of Monday none had publicly agreed to do so, Reuters reported.
Democratic state attorneys general tend to join antitrust lawsuits and may be hesitant to work with Trump’s Justice Department while traditional Republican state attorneys general would be skeptical of a lawsuit to stop a vertical merger, said Seth Bloom, a veteran of the Justice Department who is now in private practice.
“In a complaint of this sort, it would be expected that state AGs would sign on to it,” he said. “I don’t know if it ultimately will mean anything.”
(Reporting by David Shepardson and Diane Bartz; Editing by Bill Rigby)