Comcast Corporation, Market Cap (as of 30/04/2015): $145.2bn
Time Warner Cable Enterprises, Market Cap (as of 30/04/2015): $43.94bn
Introduction
The dream of combining the two American giant companies Comcast and Time Warner Cable has come to an end. On April 17, Comcast officially dropped its $45.2bn bid for TWC due to regulatory issues. The transaction, announced 14 months ago, would have given Comcast-TWC the control of one third of the US pay television and broadband markets, and would have transformed the US media and Internet landscape. However, the deal was blocked by the US Justice Department as it was seen against the public interest of American consumers.
About the companies
Time Warner Cable Enterprises Inc. is a US-based cable telecommunications company that was spun-off from its parent company Time Warner Inc. in March 2009. The American company serves customers in 29 states and has 31 operating divisions. TWC is the second largest cable company in the US (after Comcast) and it is one of the largest high-speed Internet provider company. The firm offers video, high-speed data and voice services in the United States with clustered cable systems located across the US, connecting about 15m customers.
Comcast Corporation is an American global media and technology company founded in 1963. Composed of two primary businesses, NBC Universal and Comcast Cable, it is the largest cable company and high-speed Internet service provider in the United States, and is also one of the major companies to provide home telephone services. NBC Universal, which is a subsidiary of Comcast founded in 2004, owns and operates American entertainment and sport cable networks such as the NBC and Telemundo, and television production operations and station groups like Universal Pictures and Universal Parks & Resorts.
The proposed deal
On February 13 2014, Comcast Corporation reached an agreement with its competitor Time Warner Cable to merge through a $45.2bn transaction. The deal was structured as a stock for stock transaction that would have resulted in TWC’s investors receiving 2.875 Comcast’s shares for each of their shares (approximately 23% of Comcast’s shares would have been held by TWC shareholders). The transaction was estimated to be accretive to Comcast, bringing about $1.5bn in operating synergies and meant to consolidate the two largest cable companies in the US in response to the decrease in cable TV profit margins. Since almost half of the gross revenues from services are remitted back to content providers, incorporating NBC Universal would certainty help boosting the margins. Moreover, since the high-speed Internet is a very concentrated market (AT&T, TWC, Comcast represent 95% of the US market), the merger with TWC would have allowed Comcast to become a more powerful player. Overall the deal was supposed to create a world class consumer and enterprise company, provide enhanced and more comprehensive residential and enterprise services, extend the benefits of scale and bring superior video and high speed data platforms to TWC customers.
Regulatory setbacks
On April 24, the proposed $45bn deal fell through amid increasing pressure from two regulatory agencies: the Federal Communications Commission (FCC), in charge of assessing the deal’s potential consequences for the public interest, and the Justice Department, which examined potential antitrust concerns. In order to fend off regulatory doubts, Comcast had planned out a divestiture of cable systems totaling 3 million subscribers, extension of current commitments in the NBCUniversal settlement, as well as broadband deployment. However, the Justice Department was not convinced with the laid-out plans, pointing towards the inability of Comcast to meet some of the previously imposed agreements after acquiring NBC Universal.
More importantly, the authorities classified the deal as both damaging for American consumers and dangerous for competition and innovation. Comcast would have controlled roughly 30% of the American pay-TV market and 57% of the broadband market after the merger. Such apparent monopoly in the broadband market could have severely affected the nascent streaming TV industry – prompting the likes of Netflix and Discovery Communications to voice their concerns. Moreover, the lack of broadband competition was an important rationale behind the FCC’s decision to reclassify broadband as a “telecommunications service” in order to enact strong net neutrality rules – preventing internet service providers from charging individuals and companies different prices for different types of access. If the deal had gone through, a supersized Comcast-TWC would have been able to act as an “internet gatekeeper” of sort, potentially abusing its market power to selectively slow down traffic or offer “fast lanes” to sites that pay more.
The aftermath of the deal failure
Both Comcast and Time Warner Cable devoted months and enormous resources to the failed transaction. For Comcast, related costs were $237m in 2014. Despite being unsuccessful in its attempt, the company will remain the largest broadband and pay-TV provider in the US. For Time Warner Cable, the drawn-out process could prove particularly costly, as the two companies did not include a breakup fee in their deal. The deal’s failure will also have widespread ramifications across Wall Street as several of the nation’s top investment banks, including JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup, will miss out on tens of millions of dollars in fees.
The collapse of the deal, one of the biggest in the media industry in recent years, effectively puts the brakes on several other multibillion-dollar transactions: Charter Communications, which is the country’s third-largest cable operator, will no longer acquire some of the Time Warner Cable markets that Comcast had expected to divest. And Charter’s planned $10.4bn acquisition of Bright House Networks was also contingent on the completion of Comcast’s acquisition.
The intense regulatory scrutiny did not stop talks about a new round of consolidation in the industry. On April 24, bankers representing Time Warner Cable and Charter Communications, began early talks. Last year, Charter – backed by billionaire John C. Malone – lost out to Comcast in the bidding for Time Warner Cable, and Mr. Malone said the company would try again if the Comcast takeover fell through. Robert D. Marcus, CEO of Time Warner Cable, stated that the company was evaluating all its options, including continuing on its own, participating in a new deal or buying back shares. Yet according to many media analysts, most of TWC’s current shareholders are anticipating potential M&A activity; thus we can expect the saga around the company to continue in the months to follow.
Future trends in the cable industry
Despite the rising level of uncertainty in the industry following the blocked deal and the imposition of new regulations, companies are likely to keep merging as online video options proliferate, the number of cable and satellite TV subscribers slips and costs rise for the shows, sports and movies piped to subscribers. At the same time, with new regulations and new products ready to hit the market, the trends in the cable industry are about to change: complete dominance of distribution seems to be over and new era of fierce completion might be on its way. This is already happening with Verizon trying smaller, customizable TV bundles and with HBO launching an online version of its content, HBO Now, which does not require a cable TV subscription. Moreover, consolidation is far from dead: the $48.5bn mega-merger of DirecTV and AT&T is still expected to go through. AT&T and DirecTV may create a new giant player, but there appears to be far less animosity towards that deal which, just like the failed Comcast-TWC deal, is being heavily lobbied for.
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