DOJ to AT&T: Sell major assets, potentially CNN, or get ready for legal battle

The standoff has revived speculation that the Trump administration is trying to retaliate against CNN for its coverage of the president.

A Justice Department spokesperson declined to comment on the ongoing negotiations with AT&T.

According to three sources who insisted on anonymity, two options were discussed at Monday's meeting.

AT&T could either divest DirecTV, the satellite broadcaster that it purchased two years ago, or it could divest all of Turner, the unit of Time Warner that includes CNN.

"Threatening Turner is a fig leaf for threatening CNN," one of the sources said.

AT&T is said to be reluctant to sell assets, especially Turner, which represents a significant portion of Time Warner's profits.

As for DirecTV, "it's a false choice," one of the sources said, saying that the offer seemed designed to disguise an attempt to punish CNN.

Earlier on Wednesday AT&T said the timing of the deal's closing is now "uncertain."

"We are in active discussions with the DOJ," John J. Stephens, chief financial officer for AT&T (T, Tech30), said at a Wells Fargo conference.

The stock of Time Warner (TWX), which owns CNN, fell more than 6.5% by Wednesday afternoon. AT&T was flat.

The New York Times and the Financial Times also reported Wednesday afternoon that the DOJ was demanding the sale of CNN or Turner as a condition of approving the deal.

The wireless giant previously said that it expected the acquisition to take effect by the end of this year. The deal was announced more than a year ago.

The U.S. government is causing the delay. Stephens' comments effectively confirmed last week's Wall Street Journal report that the government is "actively considering" an antitrust lawsuit to block the impending acquisition.

While the Justice Department declined to comment, sources had told the Journal that the department will sue if it can't reach an agreement on so-called "conditions" that are attached to the deal.

The Journal story was an unwelcome surprise for AT&T executives. Transactions like Comcast's acquisition of NBCUniversal in 2011 are routinely approved with conditions attached.

"For over 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market," AT&T said last week. "While we won't comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception."

The Justice Department's hardline approach to AT&T -- belying the business-friendly image of the Trump administration -- has spurred questions about Trump's personal interest in the deal.

Time Warner's portfolio also includes Warner Bros., HBO, TNT and TBS.

As a candidate, President Trump publicly vowed to block the deal. As president, he frequently criticizes CNN. Over the summer The New York Times reported that Trump aides discussed using the pending deal as a powerful form of leverage over CNN's coverage.

"You have to wonder" about the behind-the-scenes machinations "given that Trump has a vendetta against CNN and has openly talked about using these types of deals to punish them," Trevor Timm, the executive director of the Freedom of the Press Foundation, told CNN last week.

On last Sunday's "Reliable Sources" on CNN, when asked whether Trump has had any involvement, counselor to the president Kellyanne Conway said "we're not going to interfere with that here."

When asked whether the president still personally opposes the AT&T-Time Warner deal, Conway said, "I haven't discussed that with him lately."

Trump was quoted criticizing the DOJ several times last week. He said he wants the department to investigate his political rivals, including Hillary Clinton.

AT&T has declined to directly comment on concerns about political interference.

But Stephens reiterated confidence in the deal at Wednesday's Wells Fargo conference, saying "these types of mergers bring great benefit to customers and have very routinely been approved by the DOJ and the federal government."

Related: Time Warner shares drop on report that DOJ may sue to block AT&T merger

AT&T and Time Warner agreed to the $85 billion deal last fall.