Comcast Wants Time Warner So Bad It Is Giving Up 3M Customers
Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) have announced that should their mega-merger be approved by regulators, Comcast will divest approximately 3.9 million subscribers to Charter Communications (NASDAQ:CHTR), which will make Charter leapfrog Cox Communications to become the nation’s second-largest cable operator, behind the beefed-up Comcast. The companies announced the deal on Monday morning.
Comcast and Charter will complete the deal in three separate transactions. The first transaction will involve Comcast selling Charter 1.4 million Time Warner Cable customers for cash, though how much it would cost Charter was not revealed. The second transaction will involve Charter and Comcast swapping 1.6 million customers, which will result in “improving the geographic presence of both companies, leading to greater operational efficiencies, improved technology deployment and enhanced customer service,” according to a joint press release from two cable operators.
The third transaction involves Comcast creating a new publicly owned cable company called SpinCo that will consist of 2.5 million current Comcast subscribers. Comcast and Time Warner shareholders — which will be just Comcast shareholders should the merger go through — will own 67 percent of SpinCo, while shareholders of the new Charter will own 33 percent of the company. Comcast will have no ownership interest in SpinCo, which will be managed entirely by Charter.
These three deals will result in the merged Comcast-Time Warner entity only owning about 30 percent of the total U.S. cable market, according to the companies’ press release. Comcast said that even with these transactions with Charter, the merger with Time Warner will still result in $1.5 billion in operating efficiencies, and Comcast shareholders will receive value through shares in SpinCo. In an investor presentation on the deals, provided by Reuters, the companies estimated that SpinCo’s enterprise value would be around $14.3 billion.
“Today’s Agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable,” Comcast CEO Brian Roberts said in a press release. “These transactions enable us to deliver meaningful value to our shareholders. The realignment of key cable markets achieved in these transactions will enable Comcast to fill in our footprint and deliver operational efficiencies and technology improvements.”
The news follows reports from last week that said Comcast would divest customers to Charter as a way to appease regulators about the merger between the two largest cable companies in the U.S. That $45.2 billion mega-merger still needs approval from the U.S. Justice Department and the Federal Communications Commission, and the approval process could take months.
The proposed merger is controversial because it would result in the company controlling 19 out of 20 major U.S. markets and providing broadband to 40 percent of the high-speed Internet market, giving an unprecedented amount of power to one company. Reducing that figure from 40 percent to 30 percent could help appease the regulators that will decide whether it is allowed to pass. The companies argue that since cable markets don’t overlap, the merger is not anticompetitive, and they’re hoping to sway regulators with that argument, as well.
Earlier this month, the companies filed a merger application and sent representatives to Washington, D.C., to speak before the Senate Judiciary Committee. Consumer rights groups and commentators on the telecom and media industries have said the merger will result in one entity retaining a huge amount of power in cable, broadband, and media content, as Comcast already owns NBC Universal. A long list of groups opposing the merger wrote a letter to Attorney General Eric Holder and FCC head Tom Wheeler, asking that the regulators not approve the merger.
Those who have been following this story since before the Comcast-Time Warner deal was announced will remember that Charter was originally the company that wanted to acquire Time Warner. Charter enlisted the help of Comcast, since the smaller company, which is currently the nation’s fourth-largest cable provider, didn’t quite have the capital to acquire Time Warner on its own. When talks between Comcast and Charter broke down, Comcast decided to just purchase the struggling Time Warner itself in a merger that, if approved, will have a huge effect on the U.S. cable and broadband landscape, mostly at the detriment to consumers.
Now it seems like Charter and Comcast are playing nice. Comcast has realized with all the backlash against the proposed merger that it needs to make some concessions to appease regulators, consumer advocacy groups, and the general public. Comcast and Time Warner have both repeatedly ranked dead last in the American Consumer Survey Index and are widely hated by the general public, which doesn’t have many other options in terms of cable and broadband service.
Industry commentators are also saying that consumers will suffer from the mega-merger despite Comcast’s repeated claims that it will be beneficial. Comcast’s domination will mean that the company can raise prices, which will be forced on consumers with no other options in terms of cable television or Internet service. Harvard Law professor Susan Crawford wrote in an article for Bloomberg that customers “will probably see prices rise, with no corresponding improvement in service.”
The Obama administration has a mixed record on approving big mergers. A merger between US Airways and American Airlines, now American Airlines Group (NASDAQ:AAL), was approved last year, but AT&T’s (NYSE:T) attempt to buy T-Mobile US (NYSE:TMUS) in 2011 wasn’t allowed. It remains to be seen if consumer outrage will prevent the FCC and the DoJ from approving the Comcast-Time Warner merger.
More From Wall St. Cheat Sheet:
- Comcast: Do Strong Earnings Sweeten the Time Warner Cable Deal?
- Comcast Takes Time Warner Merger to Washington
- One Carrier to Rule Them All: Why Comcast Wants to Conquer Cable
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