AT&T, Time Warner stocks sink amid DOJ lawsuit report, but threat could be more about leverage, analyst says

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Wells Fargo analyst Jennifer Fritzsche said her firm remained quite confident the deal would close by year-end.

AT&T’s and Time Warner’s stocks are taking a hit (down about 1% and more than 4% respectively) amid reports the Justice Dept. is prepping for a possible suit to block their proposed $85 billion merger.

According to the Wall Street Journal, Justice Department officials are preparing for litigation in the event the agency can’t reach settlement terms in its antitrust review of the transaction. The report indicates the Justice Department could go either way on the deal but that the companies are not yet close to terms.

AT&T and Time Warner were able to dodge an FCC review of the proposed merger when that agency decided that, since now FCC licenses are being transferred, the deal is out of its purview. And up until now, based on precedent of similar vertical mergers like Comcast and NBCUniversal, consensus had been that the DOJ would likely sign off on the deal.

The new report from the Journal seemed to cast some doubt on that approval—at least in the eyes of investors—but the DOJ’s reported activities could be more about throwing weight around than actually blocking the transaction.

RELATED: AT&T, Time Warner extend merger deadline as U.S. Justice Department signoff still eludes

Wells Fargo analyst Jennifer Fritzsche said her firm was with AT&T’s investor relations team recently and that it remained quite confident the deal would close by year-end.

“While it is clear things remain very fluid, according to our D.C. sources, these headlines may be more about increasing the Department's leverage in negotiating conditions than a serious intent to try and sue to block the deal. We would note that nothing about the actual law or precedent for DOJ approving vertical mergers has changed. This is still a vertical merger and the DOJ would face the same uphill battle in court if it sued to stop it, same hurdles it faced a month or 6 months ago. Nothing has changed about the law or precedent since the new head of the Antitrust Division was confirmed,” wrote Fritzsche in a research note.

In September, the U.S. Senate approved President Donald Trump’s appointee Makan Delrahim, who previously worked as a lobbyist for AT&T and Qualcomm, to head up the DOJ’s antitrust division.

AT&T recently extended the Oct. 22 transaction termination deadline for a “short period of time to facilitate obtaining final regulatory approval required to close the merger.”

The extension comes after AT&T last week earned the blessing of Brazilian antitrust agency Conselho Administrativo de Defesa Econômica (CADE). CADE’s approval came with conditions but will require neither AT&T nor Time Warner to divest any assets.