U.S. sues to block AT&T purchase of Time Warner - source

By Diane Bartz and David Shepardson

WASHINGTON (Reuters) - The U.S. Department of Justice will sue AT&T Inc later on Monday to block its $85.4 billion acquisition of Time Warner Inc , a source familiar with the matter told Reuters.

The legal challenge was expected after AT&T rejected a demand by the Justice Department earlier this month to divest its DirecTV unit or Time Warner's Turner Broadcasting - which contains news network CNN - in order to win antitrust approval.

AT&T's chief executive said then that he would defend the deal in court to win approval, and the company criticized the Justice Department's case on Monday.

The lawsuit is "a radical and inexplicable departure from decades of antitrust precedent," said AT&T lawyer David McAtee, arguing that so-called vertical mergers, between companies that are not direct competitors, are routinely approved.

"We see no legitimate reason for our merger to be treated differently," he said, adding that AT&T is confident a judge will reject the Justice Department's case.

Time Warner's shares dropped 1.1 percent to close at $87.71, while AT&T shares closed up 0.4 percent at $34.64.

The No. 2 U.S. wireless carrier struck a deal in October 2016 to buy Time Warner, which also owns the premium channel HBO and movie studio Warner Bros, so it can bundle video entertainment on its mobile service.

AT&T says that would help it compete with emerging technology companies such as Netflix Inc , Amazon.com Inc's Prime Video and other competitors.

The deal instantly became a political lightning rod. Donald Trump, a frequent critic of Time Warner's CNN, attacked the merger on the campaign trail last year, vowing that as president his Justice Department would block it.

The deal is also opposed by an array of consumer groups and smaller television networks on the grounds that it would give AT&T too much power over the content it would distribute to its wireless customers.

Reuters reported earlier this month that the Justice Department believed the merger would raise costs for rival entertainment distributors and stifle innovation and could allow AT&T to withhold key content from HBO, CNN or other of its channels from competitors.

Last week, the Justice Department had approached 18 state attorneys general asking them to join the challenge of the deal, but as of Monday none had publicly agreed to do so, Reuters reported.

During his campaign, Trump said that reporters had covered him unfairly and has continued to attack CNN as president, which he has labelled as "fake news." He has not commented on the AT&T deal since his inauguration in January.

U.S. Attorney General Jeff Sessions declined to say last week if anyone from the White House had discussed the merger with any Justice Department officials.

(Reporting by David Shepardson and Diane Bartz; Editing by Bill Rigby)