According to a recent Bloomberg report, the big ticket merger between Comcast Corp. CMCSA and Time Warner Cable Inc. TWC is on the verge of termination. The $45.2 billion merger deal, which has been in the talks for the last 14-month, may not see the light of the day as the regulator Federal Communications Commission (FCC) and the Department of Justice (DOJ) expressed strong reservation against it.
Earlier, The Wall Street Journal reported that the FCC is considering to issue a hearing designated in which an administrate law judge will rule on if the combined company would benefit the public interest. However, that procedure will take several more months to be completed.
Comcast, the largest cable MSO (multi service operator) in the U.S. had decided to take-over Time Warner Cable, the second largest cable MSO, in order to form a giant telecom firm to offer triple play video, high-speed data and telephony services to both residential and business customers. The proposed deal faced severe opposition from the day of inception owing to the possibility of monopolistic practice.
The FCC’s major antitrust concern is that the combined Comcast-Time Warner Cable entity will control 35% of the total U.S. pay-TV market and almost 60% of the high-speed broadband (Internet) market. Notably, in Jan 2015, the FCC had raised the download and upload speeds of Internet to be deemed as broadband. The recent changes made in the minimum broadband speed will raise the combined Comcast-Time Warner Cable market share to more than 60% as Comcast serves a high percentage of high-end broadband users.
In favor of the deal, Comcast has argued that the two companies are not going to overlap each other’s operational territory. Furthermore, the deal will serve public interest as it will bring a better quality video and broadband services to Time Warner Cable customers and expand low income broadband options. However, the FCC did not find much potential in the arguments.
Immediate Impact of Deal Termination
The two proposed deal of the cable TV industry will be abandoned once Comcast opts out of the Time Warner Cable acquisition deal.
In Aug 2014, Comcast had decided to spin-off 3.9 million Time Warner Cable video subscribers as a separate entity only if the deal gets regulatory approval. The new entity would have been named GreatLand Connections Inc., with Comcast controlling 67% and Charter Communications Inc. CHTR owing the remaining 33%. The total deal size stood at approximately $20 billion.
In Mar 2015, Bloomberg reported that Charter Communications was negotiating a buyout of privately held cable TV operator Bright House Networks LLC. The $10.4 billion bid of Charter Communications for Bright House was contingent on the completion of Comcast-Time Warner Cable deal. However, the deal now stands null and void.
Notably, it was the Charter Communications which had first expressed its desire to acquire Time Warner Cable and had placed the bid for the same. However, the company lost the race to Comcast. Charter Communications intends to place a renewed bid for Time Warner Cable if Comcast fails to clear regulatory hurdle.
FCC: Strict on Big Ticket Merger Deals
Over the last 4 years, telecom regulatory body the FCC appears to be very strict in its view regarding the formation of monopolistic power within the industry (telecom and pay-TV).
In 2011, telecom behemoth AT&T Inc. T placed a $39 billion bid for gaining full control of T-Mobile U.S. Inc. TMUS. Deutsche Telekom AG, the parent company of T-Mobile US, also provided its sanction for the deal. However, after a close scrutiny, the FCC thwarted AT&T’s attempt to acquire T-Mobile U.S., stating that it seeks a minimum of four national carriers in order to maintain competitiveness.
In Jul 2014, Sprint Corp. S offered $16 billion for a little over 50% stake in T-Mobile U.S. Again the deal was thoroughly evaluated by both the FCC and the DOJ. However, the regulators decided on the same and Sprint consequently opted out from the race.
In this regard, it is also important to mention that in Feb 2015, the FCC endorsed net neutrality laws which will classify high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. The reclassification of Internet makes a radical change in the way the government treats high-speed broadband service and Internet Service Providers (ISP). The FCC can strongly regulate the ISPs now.
Bottom Line
In spite of FCC’s strict vigil, we believe that the U.S. telecom industry is likely to witness more mergers and acquisitions going forward. The U.S. pay-TV and high-speed data markets are intensely competitive and almost saturated. Success in these businesses largely depends on technical superiority, quality of services and scalability. This will compel small players to merge with larger peers.
On the other hand, owing to the rising demand for scarce and valuable wireless spectrum, mergers and acquisitions have increased exponentially in the mobile service industry. While established players need more spectrum to gain competitiveness, small players prefer to collaborate with stronger rivals rather than trying to establish a nationwide foothold which is extremely capital-intensive.
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