Comcast-Time Warner Cable: CMCSA Makes a $45.2B Gamble

by Jonathan Berr | February 13, 2014 12:13 pm

Comcast (CMCSA[1]) CEO Brian Roberts must be a pretty good poker player, judging from his new $45.2 billion bet on Time Warner Cable (TWC[2]).

Most of the media reports over the past few weeks had argued that Philadelphia-based Comcast would join forces with John Malone’s Charter Communications (CHTR[3]) to buy Time Warner Cable, the country’s second-largest cable company. In turn, it would buy Time Warner’s crown jewel — its operations in New York and Los Angeles.

Time Warner Cable, however, wasn’t too keen joining forces with Malone.

Indeed, CNBC’s David Faber and others have noted that Comcast CEO Brian Roberts was reluctant to buy the whole of Time Warner Cable out of fear of running afoul of the Federal Communications Commission. Executives at TWC, though, managed to allay Roberts’ concerns … but it remains unclear exactly how that was accomplished.

Although Roberts has argued that the deal will clear antitrust regulators since the companies’ service territories don’t overlap with one another and there are no caps on cable ownership, others are not so sure. Gene Kimmelman of the advocacy group Public Knowledge told the Wall Street Journal that the transaction is “dangerous for broadband competition and would likely inflate consumer prices.”[4] Another activist, Free Press CEO Craig Aaron, warned in a statement: “This deal would be a disaster for consumers and must be stopped.”[5]

It also raises questions about the future of satellite providers such as DirecTV (DTV). Let’s set aside the question about the often-unpredictable world of government regulators and take a closer look at the deal. On paper, combining the two companies is a no-brainer. A combined Comcast/Time Warner Cable deal would be able to fight efforts by content providers to increase retransmission fees far more easily than the likes of DirecTV and Dish Network (DISH).

Combining the two companies also would create a formidable competitor  with more than 60 million video and Internet subscribers and about 15 million voice customers. Meanwhile, CMCSA would enjoy the cream of Time Warner Cable’s business is in Los Angeles and New York — two markets that are of keen interest to Comcast’s satellite TV rivals and Verizon’s (VZ[6]) FioS service.

Speaking on CNBC, CBS (CBS[7]) CEO Les Moonves, who won a high-profile fee dispute with Time Warner Cable over the summer, struck a conciliatory tune. He doesn’t foresee any similar problems with Comcast.

“I think Comcast appreciates the value of our content and will pay appropriately” for it, he said, adding that CBS is still “looking at the ramifications” of the transaction.

And even if you brush aside the antitrust concerns, this deal isn’t a slam dunk.

Comcast-Time Warner Cable: A Pimpled Behemoth

Interestingly, there is no break-up fee in this transaction, which is unusual in a deal of this magnitude. Either Comcast is supremely confident or supremely foolish. Moreover, the all-stock transaction values Time Warner Cable at $158.82, a significant premium over its recent price. Of course, TWC stock is up significantly on the news while CMCSA stock is down a few percentage points.

Also, TWC’s “jewels” are expensive markets to serve given their population densities, and in the case of L.A., large geographical areas. Time Warner Cable, like Comcast, also has invested heavily in sports programming. It recently signed an $8.5 billion for the rights to the Los Angeles Dodgers and another $5 billion or so for the Los Angeles Lakers.

Comcast might also have to keep a lid on rates to appease the concerns of antitrust regulators.

One of Comcast’s biggest weaknesses is customer service — another facet of business that must be improved if the Time Warner Cable deal is to succeed. CMCSA has outsourced that key business function to the Philippines, and Twitter and Facebook are full of personal anecdotes about how awful their dealings have been. My own personal experiences parallel those.

Investors also can’t forget about John Malone, who plays the role of wild card in this situation. Although it’s unlikely that he will counter-offer for Time Warner Cable, the cable tycoon could pressure regulators to scuttle Comcast’s deal. Or Charter could buy the systems that Comcast would divest as part of the conditions for antitrust review. It’s hard to tell. But Charter shareholders aren’t taking the move lightly; CHTR stock is getting pounded in Thursday trading.

Bottom Line

Buying a stock based on potential M&A is foolish, because not only do deals sometimes fall through, but many times, deals don’t live up to their inflated expectations of the companies involved and the Wall Street analysts who follow them.

Comcast at least continues to confound the naysayers, including me. While analysts still see more upside ahead, however, I wouldn’t pull the trigger — CMCSA has too many unknowns (such as the Olympics, which is a nominally profitable business at best) and the Time Warner Cable deal. TWC itself is far less attractive than Comcast on its own.

And Charter? CHTR seems too risky as well because absent the Time Warner Cable deal, its only path to growth would seem to be an acquisition of Cablevision (CVC[8]) … but that company  is losing customers to FioS, among others, and has almost $10 billion in debt at the end of the last quarter. Plus, it remains to be seen whether the Dolans, who control Cablevision, would be interested in selling.   

Now that Comcast’s Roberts has placed all of his chips in on Time Warner Cable, Wall Street will want to see payoffs sooner rather than later. They don’t take kindly to bluffing.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

  1. CMCSA:
  2. TWC:
  3. CHTR:
  4. “dangerous for broadband competition and would likely inflate consumer prices.”:
  5. “This deal would be a disaster for consumers and must be stopped.”:
  6. VZ:
  7. CBS:
  8. CVC:

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