Updated: AT&T vows to fight DOJ suit analysts call 'unprecedented'

The U.S. Department of Justice filed a lawsuit to block AT&T's $85.4 billion acquisition of Time Warner, capping weeks of speculation about whether it would move against the tie-up. And the two companies are preparing for a fight for a deal that would further blur the lines between wireless and digital media.

Bloomberg was among the first to report Monday that the Justice Department was planning to make “a major antitrust announcement” Monday afternoon. The agency finally made it official late in the day, laying out its objections in a 23-page document.

"(W)ere this merger to proceed, the newly combined firm would--just as AT&T/DirecTV has already predicted--use its control of Time Warner programming as a weapon to harm competition," the Justice Department said in the lawsuit."AT&T/DirecTV would hinder its rivals by forcing them to pay millions of dollars more per year for Time Warner's networks, and it would use its increased power to slow the industry's transition to new and exciting video distribution models that provide greater choice for consumers."

AT&T is hoping to expand a digital media business it moved into in earnest in 2015 with the $48.5 billion acquisition of DirecTV. Verizon also hopes to build a digital media empire following last year’s $4.83 billion pickup of Yahoo, which followed its 2015 buyout of AOL.

Both carriers are looking to digital media to offset growth in the U.S. wireless market that has slowed to a crawl. They not only hope to continue to deliver OTT video and other offerings, but they’re also looking to amass data to deliver highly targeted ads across mobile devices, laptops, TVs and other platforms.

AT&T is not backing down.

“Today’s DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent,” David McAtee, AT&T’s general counsel, said in a prepared statement. “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.”

Indeed, AT&T is moving aggressively to position the proposed tie-up as a vertical merger between two companies from distinct markets in which neither clearly dominates. Richard Nixon was in the White House the last time a vertical merger was blocked by the Justice Department, the carrier said.

Multiple analysts say the Justice Department faces a significant challenge in proving its case in court. The lawsuit "goes against almost 40 years of judicial commentary and action, and, therefore, is quite unprecedented," Kannan Vankateshware of Barclays wrote in a research note, and whether the deal truly established potential harm is far from clear. 

Cowen Research analysts agreed, but noted that AT&T may have divest some assets--something it appears to be unwilling to do--to gain approval.

"In our layman's view, we believe that the confidence displayed (Monday) at AT&T's press conference has merit," Cowen analysts wrote. "The DoJ has the burden of proof and is going up against decades of legal precedent on a complaint that in our humble opinion seems overly simplistic.... We believe AT&T will ultimately prove victorious."

However, there's a chance that the lawsuit could result in yet another failed tie-up in the wireless world. Sprint and T-Mobile called off merger talks two weeks ago—for the time being, at least—ending long-standing speculation that the two carriers would join forces, and pushback from federal regulators forced the two operators to drop efforts to merge a few years ago. And a lawsuit from the Justice Department forced AT&T to drop its effort to acquire T-Mobile for $39 billion in 2011.

An AT&T takeover of Time Warner isn’t comparable to those proposed deals, of course, because it would combine a wireless service provider with a cable operator. But a lawsuit from the Justice Department would pose a major threat nonetheless.