The potential acquisition of Time Warner Cable Inc. (NYSE:TWC) by Comcast Corp. (NASDAQ:CMCSA) appears to be gaining traction. According to an exclusive report from Reuters, Comcast has hired JPMorgan Chase & Co. (NYSE:JPM) as an advisor as it seeks to evaluate the prospects of a bid for Time Warner Cable.
Reuters also suggests that Comcast is not preparing to make a preemptive bid for Time Warner Cable, which has had continuous discussions with Charter Communications Inc. (NASDAQ:CHTR) over the past several months. But, people familiar with the matter tell Reuters that Time Warner Cable considers Comcast to be the best merger partner because of its ability to make an all-cash offer and because of its better geographic fit. With Comcast’s market value of over $127 billion, it can certainly manage the capital necessary to make a significant bid for Time Warner Cable, valued at $37 billion, if it decides to move forward.
But a merger between Comcast and Time Warner Cable, the largest and second largest U.S. cable providers, respectively, would mean that one company would potentially control more than one third of the pay TV market, likely raising red flags from antitrust regulators at the Justice Department and the Federal Communications Commission. Reuters notes that the new FCC Chairman, Tom Wheeler, spent the first several days in office taking a hard line stance against wireless providers while speaking out about promoting competition.
Competition is certainly a concern, considering the raw numbers of subscribers. Comcast currently has 23 million subscribers; Time Warner Cable has about 12 million. Following the number one and number two cable providers, Cox Communications comes in at number three with 4.5 million subscribers and then Charter comes in at number four with 4.2 million subscribers. That means that a potential Comcast-Time Warner Cable merger could create a scenario where the number one cable provider has 35 million subscribers while the number two, Cox, has only 4.5 million.
While that definitely seems like a scenario that the regulators would put a stop to, industry experts tell Reuters that that’s not necessarily the case. Because cable operators do not generally offer products in the same market, competing instead with satellite providers and telecom TV services, regulators might give it a pass, as it doesn’t directly impact rival cable providers — at least, not at first.
For Charter, which has been interested in acquiring Time Warner Cable since last spring, the deal has gotten increasingly expensive, as Time Warner Cable’s stock has increased from the mid $90s in May to its current price above $130 due to takeover speculation. People close to the matter also suggest that Cox is evaluating the prospect of a bid, too, meaning that all the top cable providers are at least in the conversation when it comes to a Time Warner Cable merger.
However, a takeover by Charter or Cox would be problematic, as bids aren’t expected to be taken seriously at anything below $150 per share. This means that a takeover of the larger Time Warner Cable by either Charter or Cox would put the company heavily in debt and push the merged company’s leverage ratio to five or six times. In comparison, Time Warner Cable’s current leverage ratio is a little over three times, while Charter’s leverage ratio is 4.9 times.
Steve Soranno, an equity analyst at Calvert Investment Management, tells Reuters, “In order to accept a deal with Charter, shareholders have to accept a fundamentally different capital structure with a heck of a lot more debt.” Soranno adds that shareholders have to ask: “How solid is its growth profile? How solid is the stock you’re getting?”
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