(Adds detail on consent decree)
By David Shepardson
WASHINGTON, Nov 2 (Reuters) - AT&T Inc and the U.S. Department of Justice are discussing conditions the No. 2 wireless carrier needs to meet in order to win government antitrust approval for its acquisition of Time Warner Inc , sources familiar with the situation told Reuters on Thursday.
The $85.4 billion deal, unveiled in October 2016, is opposed by an array of consumer groups and competitors on the grounds that it would give the wireless company too much power over the media it would carry on its own network.
Wall Street largely believes the transaction will go through, but its success is not assured, and the issue has become a political battleground.
Donald Trump, who has accused Time Warner's CNN and other media of being unfair to him, criticized the deal on the campaign trail last year and vowed that as president his Justice Department would block it. As president, he has not revisited the subject.
Approval of the deal marks an early challenge for Trump's appointee as the Justice Department's antitrust chief, Makan Delrahim, who was confirmed by Congress in late September. Delrahim said at his confirmation hearing in May that he would not discuss antitrust matters with the White House.
Delrahim, perhaps looking to make a mark in his new job, may want to ramp up pressure on AT&T. The Wall Street Journal reported earlier on Thursday that the Justice Department was laying the groundwork for a potential lawsuit aimed at stopping the deal if settlement talks did not work out. on.wsj.com/2gW1l9O.
The Journal reported that the outcome could go either way. It did not say what the sticking points were. The Justice Department did not reply to requests for comment.
Shares of Time Warner initially plunged after the Journal report, but recovered some losses and closed down 3.7 percent at $94.70. AT&T's shares closed down 1.1 percent at $33.17.
"The market is saying that the deal still most likely gets done," said Craig Moffett, an analyst at MoffettNathanson. "It's just not as much of a sure thing as it was yesterday."
AT&T has said it expected the deal to close by the end of the year. AT&T executives have repeatedly expressed confidence that it would reach an agreement with the antitrust enforcer.
"When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios," AT&T said in a statement on Thursday.
"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. "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."
Arguments over the deal have focused on how much power a pay-TV provider should have in steering its customers to cable channels that it also owns. Critics from both parties argue that AT&T's purchase of Time Warner would give it the clout to steer customers to its own premium content.
Time Warner properties include CNN, HBO, the film studio Warner Bros and other coveted media assets.
Trump has not repeated his criticism of the deal since becoming president, and he has met with AT&T Chief Executive Randall Stephenson at least twice in 2017.
Delrahim underscored in May that he would not be swayed by political considerations.
"The independence of the decisions made in prosecuting and reviewing mergers as well as other conduct is a serious one that should be free from any political influence," he said. "They will be free if I am fortunate enough to be confirmed."
Daphna Ziman, the founder and president of Cinémoi, a female-owned TV network, told Reuters last month she had met with the Justice Department to discuss the merger. She told a U.S. Senate panel that "further consolidation could be catastrophic to diverse, minority and women-owned voices."
The Justice Department has been discussing whether to require conditions that AT&T does not discriminate against channels that compete with Time Warner and unfairly advantage its own channels, time limits on any such conditions and customer data issues, sources told Reuters.
Barclays analysts said similar issues were addressed in the Justice Department's seven-year consent decree allowing Comcast Corp to acquire NBCUniversal in 2011.
Companies that produce TV shows have been pushing for a longer consent decree in the AT&T/Time Warner deal, a separate source told Reuters on Thursday.
Wall Street played down the news on Thursday as a threat to the deal.
"These headlines may be more about increasing the (Justice) Department's leverage in negotiating conditions than a serious intent to try and sue to block the deal,” said Jennifer Fritzsche, analyst at Wells Fargo. "This is still a vertical merger and the DOJ would face the same uphill battle in court if it sued to stop it, same hurdles it faced a month or six months ago." (Reporting by David Shepardson and Diane Bartz in Washington, Jessica Toonkel and Anjali Athavaley in New York, Lisa Richwine in Los Angeles and Aishwarya Venugopal in Bengaluru; Editing by Patrick Graham and Bill Rigby)