AT&T Inc. can add Wall Street to the list of parties skeptical of its $85.4 billion deal to buy Time Warner Inc.

Shares of Time Warner dropped 2% to $87.69, below AT&T's offer of $107.50 a share, while shares of AT&T fell 1.5% to $36.93 in morning trading.

The Monday price of Time Warner, trading about 18% below the deal value, means the market is figuring about a 40% chance that the deal will be approved, one arbitrage fund manager, who declined to be identified, said Monday morning.

"There is a litany of things to worry about," said analyst Craig Moffett with MoffettNathanson. "The deal faces a steep uphill climb in Washington, and it obviously isn't helped by the fact that both the Republicans and the Democrats have now come out against it."

After the announcement of the transaction over the weekend, lawmakers, media rivals, and politicians—including Republican presidential nominee Donald Trump and Democratic vice presidential nominee Tim Kaine— came out against the deal, calling for intense regulatory review over concerns that it could hurt consumers and concentrate too much media influence in one company.

Positioning the deal as the marriage of Time Warner's robust content lineup with the carrier's millions of wireless and pay television subscribers, AT&T Chief Executive Randall Stephenson has argued as a vertical combination the deal won't trip some of the antitrust triggers at the Justice Department.

AT&T anticipates "that the regulators may have some issues that they want to deal on this, there may be conditions, but we're convinced that this type of issues can be handled with conditions," Mr. Stephenson told analysts Monday.

But the industrial logic of a vertical deal doesn't win over Wall Street.

"We historically have not believed in the strategic benefits of vertical integration," Citibank analyst Jason Bazinet wrote in a note to clients. He cast doubt on the idea that owning a fixed or mobile network provides media companies better data to customize their content, along with new advertising and distribution opportunities beyond the traditional pay TV model.

AT&T's Mr. Stephenson said that owning content will make it easier for the carrier to adapt to various platforms quickly in a way that is time-consuming and difficult in a partnership structure.

"It's slow, it's painful, just the contracting itself takes a lot of time whereas when it's completely owned, you just move a lot faster," he said Monday.

Analysts note that many of the attractive aspects of owning content—such as keeping it out of the hands of other distributors or giving it free distribution- -would be barred by regulators.

Wells Fargo analyst Jennifer Fritzsche said the deal should give AT&T leverage against competitors like Comcast Corp., along with Amazon.com Inc. and other over-the-top players who own content. AT&T is one of only two companies, other being Dish Network Corp., with rights to national video distribution.

"So to layer on content on top of this makes it unique in a crowded field, in our view," Ms. Fritzsche said.

Wall Street is also taking a hard look at other aspects of the deal from how it swells the carrier's already large debt load, to how it could take resources away from its wireless network and create a distraction while it is still integrating satellite television provider DirecTV, which it bought for almost $50 billion a year ago.

AT&T expects to be able to wring out $1 billion of cost saving after the merger and Mr. Stephenson noted Monday that it was ahead of its $2.5 billion cost savings plan on DirecTV.

The deal, which includes $40 billion of bridge loans, will make AT&T, the largest nonfinancial corporate issuer of dollar denominated debt, among the most heavily indebted companies. It already has about $119 billion in net debt—roughly double what it was five years ago.

AT&T has said that it expects to preserve its investment-grade rating.

"AT&T has a very sound balance sheet and our cash generation is strong," a company spokesman said Sunday.

Write to Thomas Gryta at thomas.gryta@wsj.com

 

(END) Dow Jones Newswires

October 24, 2016 11:25 ET (15:25 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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