Comcast and Time Warner: Big, Bad, and Ugly
It’s official: media and technology giant Comcast (NASDAQ:CMCSA)(NASDAQ:CMCSK) has announced its intention to merge with other media and technology giant Time Warner Cable (NYSE:TWC), naysayers be damned. After much speculation and a little bit of drama, the two companies proclaimed the “strategic combination” — the corporate equivalent of a political marriage — on Thursday.
Comcast will purchase 100 percent of Time Warner in a stock-for-stock transaction, acquiring each of Time Warner’s 284.9 million outstanding shares for 2.875 shares of CMCSA in an equity deal valued at approximately $45.2 billion, or about $158.82 per share. Time Warner shareholders will be left owning 23 percent of Comcast’s common stock. Comcast Chairman and CEO Brian Roberts added that the company intends “to expand our buyback program by an additional $10 billion at the close of the transaction. We believe there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x Operating Cash Flow.”
Speaking of cash flow and operational efficiencies, Comcast and Time Warner executives believe the deal will be accretive to cash flow and that they can squeeze about $1.5 billion in efficiencies from the combined entity. The veracity of this claim has been questioned by skeptics of the deal, but scale is a compelling argument. The new Comcast would have a full 30 percent of the U.S. pay television market (about 30 million subscribers) under its belt, and a presence in 19 out of 20 of the nation’s largest television markets.
This would make it the biggest, baddest provider in the country. According to data compiled by Bloomberg, at the end of 2013, the next-largest competitor, AT&T (NYSE:T), had 21.9 million video and broadband subscribers, and Verizon (NYSE:VZ) had 14.3 million.
The deal has attracted no shortage of opposition from both regulators and the public. Customers are clearly worried about the quality of their service. As far as that is concerned, both Comcast and Time Warner have earned a reputation as some of the worst in the country. They are the two worst-ranked businesses in the cable industry, according to the American Customer Satisfaction Index, and pretty much no one is expecting service to get better after the merger.
There are some bigger-picture concerns with the deal, though. The day that Comcast and Time Warner announced their intentions, Free Press, an Internet and media freedom advocacy group, put up a petition on its website. “No one woke up this morning wishing their cable company was bigger or had more control over what they watch and how they get online,” the organization wrote. “But that’s the reality we’ll face unless the Justice Department and the Federal Communications Commission do their jobs and block this merger.” There is also a petition filed on the White House petitions website, but it will need 95,000 more signatures by March 15 to invoke a response from the government.
Even Comcast Executive Vice President David Cohen — who was pretty much the mastermind of the deal — said it “may sound scary” to people. But Cohen and the rest of the Comcast-Time Warner executive team are, of course, cheery. “The new cable company, which will be led by President and CEO Neil Smit, will generate multiple pro-consumer and pro-competitive benefits, including an accelerated deployment of existing and new innovative products and services for millions of customers,” the companies said in the merger announcement.
But the fundamental problem with the deal is that the new Comcast-Time Warner entity won’t just be a media company. Because Internet has become such a critical part of life in the United States, Comcast is effectively an infrastructure company with control over what amounts to a utility — and, as such, it won’t be subject to proper competition or regulation.
“For a country attempting to compete on the global stage, this is a problem,” wrote Harvard Law School professor Susan Crawford in a piece for Bloomberg. “Whatever happens to this particular combination, let’s keep the bigger picture in mind: High-speed wired connections are now infrastructure, just like bridges, roads, and water. We can’t flourish as a country unless someone takes the long view and ensures that American businesses aren’t forced to pay whatever tribute Comcast demands in order to thrive.”