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AT&T Can’t Easily Cut Connection With CNN or Turner (Analysis)

Will AT&T hang up on its quest for Time Warner if it can’t hang on to some of its most valuable assets?

Answering that question could become paramount in the company’s effort to secure the $85 billion merger it proposed with Time Warner in October. According to a source familiar with the negotiations between AT&T and the U.S. Department of Justice, the agency met with AT&T officials earlier this week and asked that the Turner networks, including CNN, be divested as a condition for the deal. There also have been reports that the DOJ said that AT&T could shed Turner or DirecTV, as a requisite condition of approval. AT&T is said to be ready to pursue the case in court.

“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,” said Randall Stephenson, chairman and chief executive of AT&T, in a statement. Time Warner could not be reached for immediate comment.

A Time Warner without CNN or Turner would make for a less appetizing morsel. CNN itself threw off $1 billion in profit in 2016 and is expected to do the same in 2017. Time Warner reported 2016 net income of approximately $3.93 billion. By those figures, CNN represents around 25% of Time Warner’s profit. The network also has global presence, not to mention tendrils in the form of news that gets disseminated via digital, mobile and even TV screens at airports. If CNN is left out of the deal, AT&T might want to rework the terms of its acquisition.

But there are other reasons for AT&T to keep the company intact. Turner owns valuable sports rights, sharing with CBS the broadcast of the NCAA’s “March Madness” men’s basketball championship tournament. That event generated a record-setting $1.24 billion in national TV advertising in 2016, according to Kantar, a tracker of ad spending. And Turner enjoys a unique relationship with the National Basketball Association, co-managing the league’s digital portfolio. Turner also has the rights to broadcast post-season Major League Baseball games.

To be sure, there’s nothing wrong with Time Warner’s other divisions, HBO and Warner Brothers. But buying Time Warner without CNN and sports rights would be akin to purchasing a balloon that had lost more than half its helium.

AT&T has some backing to fight the Department of Justice in court. The government agency’s push appears shaded by politics. President Donald Trump has been vocal on social media and in press conferences about his dislike of CNN and its reporting on his administration’s policies.

That’s hardly a legal reason to squelch a merger after the government has let pass tie-ups of Comcast and NBCUniversal and Charter Communications and Time Warner Cable.

“It is unclear what specific law is being violated or how consumers are being harmed by that vertical integration” of Time Warner being folded into AT&T, said Richard Greenfield, a media-industry analyst with BTIG Research in a report issued Wednesday.

Still, there are reasons to scrutinize the AT&T-Time Warner tie-up. Consumer advocates fret it might place too much control over media assets in the hands of a single entity. But focusing scrutiny on CNN strikes some as a government overreach. “While there are plenty of good reasons to oppose AT&T’s Time Warner takeover, punishing CNN for trying to hold this administration accountable isn’t one of them,” said Craig Aaron, chief executive of Free Press, a consumer advocacy organization. “No matter where you come down on this merger, everyone should agree that the government shouldn’t base antitrust decisions or FCC rulings on whether it likes a newsroom’s coverage.”

AT&T could face other pressure to push back. How does a company eager to snap up programming like HBO’s “Real Time with Bill Maher” and “Last Week Tonight with John Oliver” and TBS’ “Conan” and “Full Frontal with Samantha Bee” convince comedians, producers and showrunners that it will advocate in their interests if it folds so quickly? Not to mention the dozens of journalists who work for CNN.

AT&T’s response to the Department of Justice will be monitored by investors, to be certain, but also by the creative community. The company once known as Ma Bell has little to gain from cutting its connection with Time Warner at the current moment – unless it wants to save on legal bills.

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