Comcast-TWC Deal May Set The Stage For Further M&As

February 13, 2014

The proposed merger of Comcast and Time Warner Cable, the nation's Nos. 1 and 2 cable TV firms, reverberated throughout the industry Thursday, as analysts speculated over deal opposition from content programmers and others as well as possibilities that satellite TV leaders Dish Network and DirecTV Group might now look to merge.

Comcast (CMCSA), which last year gained full ownership of media giant NBC Universal, offered $45 billion for Time Warner Cable (TWC) in an all-stock deal, the companies announced early Thursday.

Shares of Charter Communications (CHTR), which had launched a hostile takeover for Time Warner Cable, fell 5.9% . Comcast made its own bid for Time Warner Cable, rather than forge a deal with Charter to divvy up TWC.

Comcast has 21.7 million video subscribers. Time Warner Cable, which lost some 830,000 video subscribers in 2013, has 11.2 million.

Comcast says it plans to divest 3 million Time Warner Cable subscribers to keep its share of the overall pay-TV market below 30%, in a bid to ease regulatory approval.

A Comcast-Time Warner Cable merger isn't a worry for consumers, Comcast CEO Brian Roberts said on a conference call with analysts.

"It will not reduce competition in any relevant market because our companies do not overlap or compete with each other," he said. "In fact, we do not operate in any of the same ZIP codes.

"There is no impact on the competitiveness of other (pay-TV companies), including DirecTV, Dish, Verizon, AT&T, because they will still be competing with the same number of competitors in each market in which they operate.

Regulators might disagree. With Time Warner Cable's subscribers, Comcast would have about 60% of all U.S. cable TV subscribers, says Bruce Leichtman, head of LRG Research.

DirecTV (DTV) had 20.16 million subscribers as of Sept. 30, and Dish Network (DISH) 14 million.

The Department of Justice blocked a proposed merger between the two in 2002. A new merger attempt might again face hurdles, even if Comcast-TWC is approved, says Bryan Kraft, an analyst at Evercore Partners.

The Comcast-Time Warner Cable "transaction, if completed, as we expect it will be, increases the probability of a potential satellite merger being approved by regulators," Kraft said in a research note. "However, a satellite TV merger is a different situation, since there is no competition between TWC and Comcast, whereas there is competition between (the satellite) operators.

Consumer Groups Object

Consumer advocacy groups such as Free Press and Public Knowledge released statements opposing the Comcast-Time Warner Cable merger on grounds that pay-TV prices could rise.

TV programmers also might oppose the merger, says Craig Moffett, an analyst at MoffettNathanson. He says programmers might feel Comcast's NBCU assets, along with Time Warner Cable's subscribers and systems in New York City and Los Angeles, would give the combined company too much bargaining clout over content carriage fees.

Comcast's service footprint would span 19 of the 20 largest U.S. cities.

"Programmers will claim that a merged Comcast/TWC would simply be too large to be allowed," Moffett told IBD via email.

Regulators will likely assess the market power of Comcast-Time Warner Cable, combined with NBCU, says Christopher King, an analyst at Stifel Nicolaus.

"The government will probably have concerns about the ability of Comcast-TWC to bully competitors and suppliers, given their interwoven cable/broadband distribution, programming control and broadcast ownership," King wrote in a report. "But we're skeptical the DOJ will want to make this an antitrust test case for vertical integration.

Other analysts expect Comcast, the No. 1 provider of broadband Internet services to homes, to make concessions to get the OK to acquire Time Warner Cable.

Net Neutrality Conditions

When Comcast acquired most of NBCU in 2011, it agreed to so-called net neutrality conditions that bar broadband service providers from blocking Internet content. It bought the rest of NBCU last year.

A recent court ruling gutted much of the Federal Communications Commission's power to require equal treatment of Internet traffic. Comcast, however, could agree to abide by the rules to win approval for acquiring TWC, analysts say.

Comcast agreed to pay $159 per share for TWC. That's more than the hostile takeover by Charter, whose biggest shareholder is John Malone-controlled Liberty Media (LMCA).

TWC rebuffed Charter's offer last month of $132.50 per share. Charter offered $83 in cash and $49.50 in Charter stock. Time Warner Cable contended the combined company would have too much debt.

"Comcast's solid investment credit rating is attractive to us," TWC CEO Robert Marcus said on a conference call with the media Thursday. "When the time comes to turn over the keys, we'll know that TWC is in very good hands.

Charter emerged from bankruptcy in late 2009 and is still unprofitable. But Charter holds sizable tax credits that Liberty's Malone aims to use in M&As.

Analysts say a Charter counterbid is unlikely, though without TWC, "Charter lacks a large dance partner," said Moffett.

Some analysts speculate Charter could be a buyer of whatever cable systems Comcast divests. They also say Charter might pursue other cable TV firms, such as Suddenlink or Cox.

Comcast said there is no break-up fee, in case regulators block the TWC acquisition.

Comcast stock fell 4.1% Thursday. Comcast had $1.7 billion in cash on its balance sheet as of Dec. 30.

Philadelphia-based Comcast on Jan. 28 announced a 15% dividend hike and said it would purchase $3 billion of its own stock in 2014.

If the Time Warner Cable deal is approved, Comcast say it'll increase its stock buyback plan by $10 billion, giving it potentially $14.5 billion in repurchase authorization.

Another Com-Quest

Bidding for TWC is the latest bold move by Comcast. Roberts' father, Ralph Roberts, founded Comcast in 1963.

Comcast became much bigger in 2002 when it acquired AT&T Broadband, whose forerunner was Malone-controlled Tele-Communications Inc. Disney (DIS) rebuffed a Comcast takeover bid in 2004.

Comcast closed a deal to buy a 49% stake in NBCUniversal from General Electric (GE) in early 2011, and it closed a deal to buy the rest of NBCU last year for $16.7 billion. The media giant owns TV broadcaster NBC, cable TV channels, movie studio Universal Pictures and theme parks.

A dual-class stock structure gives the Roberts family control of 33% of Comcast's voting power. They own 1% of Comcast shares.