Comcast-TWC Merger Called Off; Where Do These Companies Stand Now

Comcast (NASDAQ:CMCSA) announced Friday that its merger agreement with Time Warner Cable (NYSE:TWC) and its related transactions agreement with Charter Communications, Inc. have been terminated. ^[1] The merger, which would have made the combined entity the largest pay-TV operator in the U.S., had garnered a lot of negative attention since it was announced in February of 2014. In this piece, we take a look at why the deal was called off and where  the two companies stand in the wake of this development.

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What Happened

Since its announcement, the proposed Comcast-Time Warner Cable (TWC) merger consistently faced stringent opposition from the general public, industry players, as well as public interest and consumer-advocacy groups. There had been indications in the last few days that the deal would find it difficult to get the required regulatory approvals, with staff attorneys at the U.S. Justice Department’s antitrust division stating that they were nearing a recommendation to block the deal, and the FCC staff recommending a procedural move that would put the merger in jeopardy. ^{[2] [3]} With the dissenting voices increasing, Comcast decided that the best course of action would be to drop the merger plans altogether. There is no break-up fee involved so the pay-TV provider will not be penalized for walking away from the deal.

Why The Regulators Were Against The Deal

FCC Chairman Tom Wheeler issued a statement on the latest developments, which made it clear why he was opposed to the merger. It was the potential power that the combined entity would have yielded in the high speed internet market that worried him the most. Earlier in the year, the FCC changed its definition of broadband Internet by revising the required download speeds to 25 Mbps or faster as opposed to the earlier speed limit of 4 Mbps. ^[4] Under the earlier definition, the combined entity would have represented just under 37% of the high speed internet market with TWC and Comcast accounting for 13% and 24% respectively. ^[5] However, Comcast’s share market share jumps to approximately 57% under the revised definition of broadband services. ^[6] Critics of the merger have argued that Comcast could use its considerable power in the broadband market to disrupt online streaming services. These streaming services have been slowly chipping away at cable pay-TV services for a while now and both TWC and Comcast have lost pay-TV subscribers as a result. Clearly, Wheeler agreed with this view as he noted that “the proposed merger would have posed an unacceptable risk to competition and innovation especially given the growing importance of high-speed broadband to online video and innovative new services.”

Where Do The Companies Stand Now?

Comcast

The merger was expected to help the combined entity’s pay-TV business the most and could potentially have had an impact on the rising content costs. The combined entity would have serviced roughly 30% of the pay-TV market and would have gained significant leverage on the distribution front. Moreover, the combined entity would have benefited from the merger synergies, especially on the advertising front. The two companies had said that the transaction would generate approximately $1.5 billion in operating synergies. However, Comcast is not overly dependent on the now-defunct merger for growth. The company has performed well in its high speed internet and pay-TV businesses in the recent past. Comcast added 1.28 million high speed internet subscribers last year to take its subscriber tally to 21.96 million subscribers at the end of 2014. ^[7] The company also added pay-TV subscribers in the fourth quarter of 2014, which was a reversal from the subscriber losses in the previous two quarters. Comcast’s pay-TV subscriber base currently stands at 22.38 million. ^[7] The improved subscriber numbers are largely due to triple play bundling. Triple play bundling is the combining of the three services offered by Comcast — pay-TV, high speed internet and voice — into one package. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale.

The company’s media arm, NBCUniversal (NBCU) grew 7.5% last year and reported revenues in excess of $25 billion. ^[7] NBCU contributes more than 32% to Comcast’s stock value, according to our estimates. Universal Studios is an integral part of this segment, bringing in approximately $5 billion in revenues last year. ^[7] In the age of big-budget movies, the studio is making money off of movies that are produced at a very reasonable budget. The studio produced or distributed fifteen movies in 2014 and eleven of those had a budget of $40 million or less. Low budget movies have lower risk attached to them and recover their costs if they have one or two good weeks at the box-office. The studio has also invested in lucrative movie franchises such as The Fast And The Furious, Fifty Shades, Despicable Me, Jurassic Park, etc., which will serve the studio well in the years to come. NBC’s broadcasting business has also been performing exceptionally well in the last few years, bringing in over $8.5 billion in revenues last year. ^[7] NBC finished the 2013-14 primetime season as the number one ranked broadcasting network in the coveted 18-49 demographic. ^[8] The network has a dependable roster of shows, including The Voice, The Blacklist, Chicago Fire, Grimm and Chicago P.D., and we believe that NBC’s broadcasting revenues can cross $13 billion in the next six to seven years.

Time Warner Cable (TWC)

Similar to Comcast, all is not lost for TWC. Charter Communications (NASDAQ:CHTR) has consistently expressed interest in acquiring TWC and Charter’s advisors have reportedly reached out to begin friendly talks on a merger. ^[9] The company had also made a failed bid for TWC in early 2014. Charter is the fifth largest pay-TV provider in the U.S. with just under 4.2 million subscribers ((MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group, Inc.)) and also provides Internet services to more than 5 million subscribers.  ^[10]  Just like the Comcast-TWC deal, Charter’s potential merger with TWC would also generate operating efficiencies. Furthermore, the deal with Charter would face less regulatory scrutiny compared to the Comcast deal, as the potential combined market shares in both the pay-TV and Internet businesses would be smaller.

TWC has also been doing well for itself lately. (Read More – Why We Are Revising Our Price Estimate For Time Warner Cable) The subscriber numbers were very positive for the company last year. The full year increase to the high speed Internet subscriber base was 657,000 as compared to 211,000 in 2013. ^[11] The company also lost fewer Pay-TV subscribers in 2014 as compared to the previous year. The company was able to avoid the lower customer satisfaction levels and frequent blackouts of various networks witnessed in the past and it will be interesting to see if it can maintain this momentum. For the year 2015, we estimate the company’s revenues will be around $23.8 billion, compared to consensus estimate of $23.9 billion, and an EPS of $8.28, compared to a consensus estimate of $8.10.

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1. COMCAST/TIME WARNER CABLE/CHARTER TRANSACTIONS TERMINATED, April 24, 2015, Comcast Press Release [↩]
2. U.S. Antitrust Lawyers Said Leaning Against Comcast Deal, April 17, 2015, Bloomberg [↩]
3. FCC Staff Recommends Hearing on Comcast-Time Warner Cable Merger, April 23, 2015, Wall Street Journal [↩]
4. Faster Internet: FCC Sets New Definition for Broadband Speeds, NBC News [↩]
5. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group, Inc. [↩]
6. REDACTED – FOR PUBLIC INSPECTION, Comcast’s SEC Filings [↩]
7. Comcast’s SEC Filings [↩] [↩] [↩] [↩] [↩]
8. NBC Finishes No. 1 In 18-49 Demo For 2013-14 Primetime Season, September 16, 2014, Deadline [↩]
9. Charter Advisers Said to Contact Time Warner Cable for Talks, April 24, 2015, Bloomberg [↩]
10. 3 MILLION ADDED BROADBAND FROM TOP PROVIDERS IN 2014, March 5, 2015, Leichtman Research Group, Inc. [↩]
11. Time Warner Cable’s SEC Filings [↩]