The US media and technology conglomerate, Comcast Corporation (NASDAQ: CMCSA) has reached an agreement in merging with competitor Time Warner Cable (NYSE: TWC) on Feb. 13, 2014, for a price of $45.2bn. The deal will be a stock-for-stock transaction with TWC’s investors receiving 2.875 Comcast stock for each of their shares; this means that approximately 23% of Comcast’s common stock will be held by Time Warner Cable shareholders. The purchase values each Time Warner Cable share at $158.82, a 17% premium on its Wednesday closing price of $135.51. The transaction will be accretive to Comcast stock, adding close to $1.5bn in operating synergies (with 50% of these synergies expected in the first year), while keeping balance sheet strength.
Currently, Comcast Corporation is the largest cable company and home internet service provider in the United States. It is comprised of two primary businesses: Comcast Cable and NBCUniversal. NBCUniversal operates 30 cable networks, the NBC and Telemundo broadcast networks, television production operations, television station groups, Universal Pictures and Universal Parks and Resorts. Comcast Cable is the largest provider of cable TV, high-speed internet, and voice to residential customers, with similar services marketed to the businesses.
Time Warner Cable, which was separated from media conglomerate Time Warner Inc. in March 12, 2009, is the second largest cable video provider, third largest High-speed internet provider (after AT&T and Comcast, respectively), and a minor player in the voice sector.
The transaction represents the consolidation of the two largest cable TV providers in the U.S. The rationale behind the consolidation is quite straightforward. As the industry currently stands, the profit margins on cable TV service is low and continues to be eroded away.
Nearly 50% of gross revenues generated from services are remitted back to content providers, such as Viacom, Disney, CBS, and other media conglomerates. However, with NBCUniversal, a major content provider being part of the new conglomerate, significant operating efficiencies can be achieved, boosting the margins on the TWC network that will be incorporated.
Nevertheless, in the recent years the cable TV market has been shrinking, losing customers to Wireline providers such as Verizon and AT&T, as well as streaming services such as Netflix, which continue to capture an increasing share of the potential market in the video sector. It is noteworthy that Comcast currently has a stake in a similar web-based content provider, Hulu, valued at $187mln (reflected on Annual SEC filings, as of 31/21/2013).
Likewise, high-speed internet is already a highly consolidated market, with only three major players, AT&T, Comcast, and TWC representing close to 95% of the market. The transaction would allow Comcast Corp to become a closer rival to AT&T, which currently has a market share of about 55% in the high-speed internet market. The merged company will reach a projected market share of 40%
However, there is a strong consumer and media uncertainty regarding the merger. Many fear that the consolidation of the two giants would translate to higher cable bills for consumers, an assertion both companies deny and suggest to the contrary.
With the net neutrality clause of FCC being weakened by the court ruling of U.S. DC District Court in January 14, 2014 in Verizon v. Federal Communications Commission , many fear that the new entity would be able to leverage the scale of its network to restructure and raise the pricing on providing bandwidth to streaming web applications.
Most internet providers, including Comcast and TWC, have previously issued public statements commenting that the court ruling will not affect consumers. However, neither TWC nor Comcast has yet commented on future plans for internet services, and the effect on the merger on their pricing structure.
Lastly, there will be some concern regarding the potential anti-trust issues. According to announcements made by Time Warner Cable, through the transaction Comcast will add approximately 11 million subscribers; however, to address competition issues, it will divest of about 3 million, resulting in a final subscription base of 30 million. As a result, Comcast’s share of managed subscribers will remain below 30% of total multichannel video programming distributor market (which combines Cable, Satellite, Wireline, and IPTV television video systems). TWC Investor Relations department comments that this market share is approximately the same as market shares of AT&T in 2002, and Adelphia in 2006.
The financial advisory to Comcast Corp. is provided by J.P. Morgan, Paul J. Taubman, and Barclays Plc.
The financial advisory to Time Warner Cable, and its board of directors, is provided by Morgan Stanley, Allen & Company, Citigroup and Centerview Partners.
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