What Does Time Warner Cable’s Merger With Comcast Mean For The Industry?

Time Warner Cable (NYSE:TWC) is going to merge with cable mammoth Comcast (NASDAQ:CMCSA) in an all-stock deal valued at $45.2 billion. ^[1] The cable industry seems to be heading for consolidation and Charter Communications has already made unsuccessful attempts to acquire the second largest cable company in the U.S. Time Warner Cable earlier stated that it will pursue a deal, which will price it around $160 a share. Charter’s bid fell short of this requirement at an offer of about $130 a share (See – Time Warner Cable Rejects Charter’s $61 Billion Bid). If Comcast acquires Time Warner Cable, it will have some serious impact on the pay-TV as well as media industry. The combined entity will command roughly 30% market share which will not only give it a competitive edge, but also strong negotiating power over content owners. However, the deal may face intense scrutiny from antitrust regulators.

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A Quick Look At Time Warner Cable

Time Warner Cable is the second largest cable operator in the U.S. with close to 11 million pay-TV subscribers. In 2013, the company generated around $22.12 billion revenues from its services that include pay-TV, broadband and voice. Debt levels are usually high for cable companies and Time Warner Cable is no exception with debt levels of around $26 billion. ^[2] The company’s stock has rallied sharply (more than 50%) in the past twelve months given the talks about consolidation in the cable industry.

What Does Comcast Gain From The Merger?

Comcast has agreed to acquire all of Time Warner Cable for $158.82 per share in a friendly merger. Time Warner Cable will be owning approximately 23% of Comcast’s common stock. ^[3] Comcast has around 22 million pay-TV subscribers and revenues of over $64.5 billion. ^[4] The company already commands close to 22% share in the U.S. pay-TV market, and the deal will push this figure over 30% after taking into account 3 million subscribers that Comcast will have to divest in the merger. The company will see significant amount of savings in operating costs in the combined entity. Moreover, it will benefit from the merger synergies, especially on the advertising front. Comcast can expand its business to a larger footprint in the U.S. and also hold key markets such as New York. The company said that the transaction will generate approximately $1.5 billion in operating efficiencies, and will be accretive to Comcast’s free cash flow per share while preserving balance sheet strength. ^[3]

However, Time Warner Cable has been a problem with its video subscribers. The company has been losing customers for quite some time now. While the trend is visible across the cable industry, the rate of loss was much higher at Time Warner Cable. This can be primarily attributed to cord-cutting due to higher cable bills, rise of alternate video platforms such as Netflix and Amazon, fierce competition from satellite and telcos, and frequent blackouts at Time Warner Cable over the retransmission and content distribution agreements.

Comcast, on the other hand, was successful in reducing the subscriber losses and in fact posted a modest gain during the fourth quarter of 2013 due to its advanced services such as X1 and Xfinity (Read More – NBCUniversal Drives Comcast’s Q4 Earnings). Post merger, the company will have to put significant efforts to revamp the markets in which Time Warner Cable operates and try to reduce the subscriber losses.

A Different Story On The Content Side

There is another story with this merger that lies on the content side. The pay-TV industry has been battling with content owners over content distribution agreements for the last few years. An increase in carriage fee directly impacts the end customer as the cable companies tend to pass these costs to their subscribers. Rising pay-TV bills is one the reasons for growth in cord cutting in the U.S. and the cable industry has seen thousands of subscribers terminate service in the past few years. Now, if Comcast succeeds in convincing the regulators about the merger, it will gain a significant leverage on distribution front. The best way to illustrate this would be discussing CBS (NYSE:CBS) blackout on Time Warner Cable. CBS is the most watched network in the U.S. and a blackout in three key areas for almost a month led to many customers venting their frustration by cord-switching or cord-cutting. This incident did not impact CBS much due to its solid summer lineup and limited viewership loss. However, if Comcast holds majority of the market, things would be different and content owners won’t be able to afford losing such a large number of viewers. With this merger, Comcast can potentially reshape the entire industry and tame the content owners over distribution fees.  Because of this increase in horizontal market share (as it is described), the level of scrutiny by both the FCC and the Justice Department is likely to be very high.

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1. TIME WARNER CABLE TO MERGE WITH COMCAST CORPORATION TO CREATE A WORLD-CLASS TECHNOLOGY AND MEDIA COMPANY, Comcast Press Release, Feb 13, 2014 [↩]
2. Time Warner Cable’s SEC Filings [↩]
3. TIME WARNER CABLE TO MERGE WITH COMCAST CORPORATION TO CREATE A WORLD-CLASS TECHNOLOGY AND MEDIA COMPANY, Comcast Press Release, Feb 13, 2014 [↩] [↩]
4. Comcast’s SEC Filings [↩]