Execs brace for regulatory scrutiny of deal but assert that it is 'approvable' by feds
The Philadelphia-based media giant that also owns NBCUniversal will gain significant leverage and scale in the fast-changing marketplace for video and broadband services as the pay TV industry grapples with the many new ways consumers have to access video.
“This is the right deal for both companies and both sets of shareholders,” Comcast chief Brian Roberts said, and it “underscores our belief in the cable business.” He called it a “unique” opportunity to create a transaction that analysts noted will give the company unprecedented scale in video and broadband markets.
Deal values Time Warner Cable at $158.82 per share — close to the $160 a share that TW Cable had sought in its jousting during the past few months with Charter Communications. There is no breakup fee in the deal for TW Cable should the deal not be able to close.
The deal terms call for TW Cable shareholders to receive 2.875 shares of Comcast stock in the swap, leaving the former’s shareholders with about 23% of Comcast’s common shares.
Roberts said Comcast envisions at least $1.5 billion in operating synergies and $400 million in savings on capital expenditures within three years. Half of those operating savings will be realized in the first 12 months, execs said. Comcast sees big long-term opportunities to improve TW Cable’s profit margins.
Interestingly, Comcast did not make too much of the potential for savings on programming costs in touting the benefits of the deal. The prospect of the merger giving Comcast a bigger club to wield in carriage negotiations with programmers is sure to be a red-flag with regulators. But it also reflects Comcast’s status as the parent company of one of the largest cable programming congloms in NBCU.
It’s clear that Comcast execs are bracing for a regulatory workout in getting the deal through the gauntlet of the FCC, the Justice Department and Federal Trade Commission. Comcast said it was prepared to divest as many as 3 million subscribers to secure the greenlight for the union. Comcast projects it will end up with about 30 million subscribers once the deal closes, up from its current base of about 22 million.
With the assumed operating efficiencies, Comcast pegged the pricetag for the acquisition at a multiple of 6.7 times TW Cable cash flow. Comcast’s debt load will climb to $71.4 billion — raising its leverage ratio to 2.4 times cash flow.
Notably, Comcast will gain a big presence in the nation’s top two TV markets New York and Los Angeles, plus a host of regional channels. In New York it will absorb TW Cable’s NY1 regional news network as well as a 26% interest in SportsNet New York. In L.A., it inherits TW Cable’s megabucks bets on two startup regional spots networks dedicated to the Los Angeles Lakers and Los Angeles Dodgers, respectively.
All told, Comcast will have presence in 19 of the nation’s top 20 markets. Execs from both camps will work together to determine which markets will be divested but none have been identified yet, according to execs.
Although the agreement instantly brought howls from media watchdog groups as being anti-consumer, Comcast execs were forceful in making the case that the deal was “approvable” by the feds.
Roberts and Comcast exec VP David Cohen, who oversees public policy issues for the media giant, repeatedly stated that the merger would not impact the broader competitive landscape as Comcast and TW Cable do not compete in any of the same zip codes across the country. The execs’ offense against the uproar about it becoming too big also included making the point that after divesting some subscribers, its sub base will be under the 30% of U.S. households, which had been the FCC’s previous limit for cable ownership under the regulation that was overturned by the courts in 2009.
“The proposed transaction will not reduce competition in any market,” Cohen said.
However, watchdog orgs pointed to the overall size and scope of the company as being able to exert a chokehold on broadband service pricing, on local and national advertising rates and carriage agreements especially with smaller programming entities.
“An enlarged Comcast would be the bully in the schoolyard, able to dictate terms to content creators, Internet companies, other communications networks that must interconnect with it, and distributors who must access its content,” said John Bergmayer, senior staff attorney for non-profit org Public Knowledge.
“By raising the costs of its rivals and business partners, an enlarged Comcast would raise costs for consumers, who ultimately pay the bills. It would be able to keep others from innovating, while facing little pressure to improve its own service. New equipment, new services, and new content would have to meet with its approval to stand any chance of succeeding,” he said.
Cohen and Roberts countered that the union will expand access to top-tier broadband service, expand the rollout of Comcast’s VOD and TV Everywhere services and foster the development of cutting-edge video and data services. They were also quick to point to the national reach of other MVPD player such as sat casters DirecTV and Dish Network.
Cohen noted that the TW Cable acquisition was inherently less complicated than Comcast’s 2011 acquisition of NBCUniversal. And the rules and restrictions that Comcast agreed to with the FCC in governing its activity as a cable operator as a result of its NBCU acquisition will now extend to TW Cable markets. Comcast’s FCC consent degree tied to the NBCU deal has another four years to run, Cohen added.
Neil Smit, prexy of Comcast Cable, will lead the combined companies. Rob Marcus, who only recently took the CEO reins of Time Warner Cable, made it clear that he will be moving on after the deal is completed.
The combo “just makes too much sense,” Marcus said, citing the ability of the larger entity to “deliver a truly great user experience.” “When the time comes to turn over the keys to (Comcast) we’ll know that Time Warner Cable is in very good hands,” he said.
Although Comcast had been seen as a contender for some parts of TW Cable systems, the deal to acquire the whole company came together quietly during the past few weeks while Charter Communications, controlled by John Malone’s Liberty Media, waged an increasingly aggressive proxy fight. On Tuesday, it unveiled a proposed slate of independent directors for TW Cable and asserted that it had received “overwhelming” support from key TW Cable shareholder for its buyout proposal that valued the company at $132.50 per share.
In a statement Thursday, Charter indicated that Comcast is overpaying.
“Charter has always maintained that our greatest opportunity to create value for our shareholders is by executing our current business plan, and that we will continue to be disciplined in this and any other M&A activity we pursue,” it said.