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AT&T's long-fought deal for Time Warner wasn't typical (and neither is DOJ's appeal)

While some are more convinced of a positive outcome for AT&T (NYSE: T) than others, it's raising questions and concerns at a time when AT&T needs to execute on many fronts.
AT&T's headquarters in Dallas.

AT&T Inc.’s deal for Time Warner is back in question again.

The U.S. Department of Justice filed an appeal Thursday after losing the case to a judge who came down firmly on AT&T’s side a month ago. The move prompted surprise in some parts of Wall Street and creates some uncertainty around a merger decision that many thought was clearly in the past.

Now, the telecommunications and media company will need to show it can navigate an ongoing legal battle in the months ahead, even as it tries to demonstrate that the agreement can benefit investors and customers. While some are more convinced of a positive outcome for AT&T (NYSE: T) than others, it’s raising questions and concerns at a time when AT&T needs to execute on many fronts.

“They have to now divert time and attention to fighting this second battle,” said Hal Vogel, a veteran industry analyst. “What you want to do if you’re in business is get on with what you’re doing, and just do the best you can.”

The deal closed just a month ago after Judge Richard Leon of the U.S. District Court on June 12 rejected the federal government’s petition, giving the green light to the $85 billion deal, according to court documents.

This timeline lays out the events leading up to the DOJ’s initial case against the merger.

It was a sweet and long-awaited victory for AT&T, which can use the tie-up to help the company compete in an industry challenged by the likes of Netflix and Amazon.com. The company had first unveiled the deal in 2016 and then was sued by the DOJ on antitrust grounds last year. Bringing it all to a close took about 600 days, and AT&T immediately went to work on more acquisitions, integration and other post-merger initiatives.

But the DOJ never completely walked away, saying it was evaluating options with respect to an appeal. And it exercised those options on Thursday, seeking help from the U.S. Court of Appeals for the District of Columbia Circuit.

Now, AT&T faces more uncertainty as it must deal with this process, which could take up to a year, according to analysts at Jefferies.

David McAtee, AT&T's general counsel, was quick to respond to the appeal. On Thursday, he said in a prepared statement the company is “ready to defend the court’s decision" that he said was thorough and well-reasoned. A day later, CEO Randall Stephenson said in an interview on CNBC that he had contemplated an “appeal from the very beginning." He expressed confidence in getting the deal done.

“This changes nothing we'll be doing over the next 30 days or the next 12 months,” Stephenson told CNBC's Julia Boorstin on Friday. "The merger is closed. We own Time Warner."

Yet the merger isn’t a typical one.

For one, it’s huge, with two massive companies with thousands of employees coming together in a deal once valued at $85 billion. And while Time Warner (NYSE: TWX) was smaller than AT&T, it still had revenue of more than $30 billion last year.

Plus, this is not a merger of like companies with similar backgrounds. It’s AT&T, whose roots reach back to the 1800s, and Time Warner, full of creative people that enchant Americans with sweeping narratives or silly comedies. Bringing the different cultures together won’t be simple. Some of that was on display when John Stankey, who leads content unit WarnerMedia, visited HBO and talked about how he wanted more from the already successful network.

The merger’s integration itself isn't simple. AT&T said it would manage Turner, which includes CNN and TBS, as a separate business unit, distinct from communications, until February of next year, or after an appeal wraps up, according to a letter filed with the court in June.

In the coming months, the case will not only involve time, but also money and resources for AT&T, Vogel noted. Many will be watching to see how the company handles it all.

Still, Walter Piecyk, an analyst with BTIG, said AT&T’s legal team can address the case while executives work on execution.

“The company is moving full steam ahead,” he said. “It shouldn’t be an overhang or a distraction for the company – the company’s got bigger issues.”

He and other analysts see AT&T prevailing in a legal battle. Judge Leon himself didn’t buy the DOJ’s case and didn’t ask for conditions on the merger in his big opinion. It was clear win for AT&T.

“I think in particular, with how strongly worded the ruling was from Judge Leon, I thought that would be enough to scare off the DOJ from filing an appeal,” said Dave Heger, an analyst with Edward Jones. “The DOJ must have some strategy that they are following here that they think they’ve got a chance, but I have to think, at least right now, the odds would be more in AT&T’s favor.”

What’s more, Judge Leon suggested the government would not success in an appeal, according to analysts at Jefferies. He also discouraged the DOJ from filing a stay, and it did not.

Yet Michael Noel, an associate professor in the department of economics at Texas Tech University, was not that surprised by the DOJ’s move. He said there’s usually more negotiations and limitations on this kind of merger.

“It doesn’t surprise me they would come back and try again,” he said. “The reason why we have an appeals system is that so very often something happens at the district level that then gets overturned.”

Noel said it’s likely the last shot for the DOJ to overturn the case, adding that the Supreme Court doesn’t usually take suits like these. The government may be concerned the decision will open the door to a surge in big merger activities.

“There’s a lot at stake in this one,” he said.

And while Judge Leon made a strong case, it’s hardly ironclad, according to Craig Moffett, an analyst with MoffettNathanson LLC. He contends that the judge bought into an argument that put too much trust into AT&T, according to a blog post. He called it “odd” in his piece.

“We’re not as sure as everyone else that Judge Leon’s ruling will be upheld on appeal,” Moffett said in the blog post. “That’s not just because the DC Circuit Court of Appeals has a reputation as a reasonably liberal court (although it does). Instead, it’s because there is actually a reasonable argument to be made here.”

Whatever happens in the case, there are signals the industry's landscape continues to change.

On the very day the DOJ made its appeal, HBO failed to take the top spot in Emmy nominations this year, falling to rival Netflix. That snapped a 17-year streak of topping the list for the older network, according to industry publication Variety.

Put another way: Netflix, which has been an investor favorite, now has a market capitalization of about $175 billion, putting it among some of the larger public companies in the U.S. AT&T’s valuation of about $230 billion is larger, though the gap has been shrinking over the years.

AT&T and Time Warner are responding to shifts in the industry, Jeff Kagan, a wireless analyst, said.

“They are making their own transformative move in order to remain competitive," he said in an email.