Hard to believe how fast time flies, but next week will mark the one-year anniversary of the announcement of Comcast’s all-stock agreement to buy Time Warner Cable, originally valued at $45 billion. And while the conventional wisdom still holds that the deal will take place by midyear, it’s becoming easier to find people who say that the union will be blocked — especially this week, after FCC Chairman Tom Wheeler endorsed tough net neutrality rules.
The chart here is as good an indicator as you’ll find of the change in Wall Street’s view. It shows the spread between the value of Comcast’s stock offer and TWC’s trading price since the deal was announced. If people felt confident that the deal would be consummated, then you’d expect to see little change. TWC investors are due to collect a fixed amount of Comcast stock, so they should trade pretty much in tandem. The growing spread suggests that people increasingly believe that TWC, the weaker of the two companies, will have to fend for itself.
What accounts for the concerns? BTIG’s Richard Greenfield articulated the view this week with a bold report (does he write any other kind?) predicting that the FCC and Justice Department will block the combination. One tipoff was Wheeler’s net neutrality announcement, which earned him cheers from open-Internet advocates and catcalls from cable and telco Internet providers. Another was the FCC’s decision to raise its threshold definition of broadband to a service that offers transmission speeds of 25 megabits per second, up from 4 mbps. That’s considered a reasonable speed to accommodate those who watch a lot of online videos. But it means that 55.3% of the country is served by just one broadband provider, and 19.4% is unserved.
“With Comcast’s scale both before and especially after the Time Warner Cable transaction, they become ‘the only way’ for a majority of Americans to receive content/programming that requires a robust broadband connection,” Greenfield says. That frightens streaming-video providers led by Netflix, especially since Comcast — which owns NBCUniversal — also is a major content provider. “Over time, the fear is that Comcast will favor its own IP-delivered video services versus third parties, similar to how it is able to offer Comcast IP-based video services as a ‘managed’ service that does not count against bandwidth caps, while third party [streaming] services that look similar count against bandwidth caps.”
The bottom line: “With the overlay of the populist uprising driving government policy, it is hard to imagine how regulators could approve the Comcast-Time Warner Cable transaction at this point.”
Another analyst, MoffettNathanson Research’s Craig Moffett, also took note of the market’s enthusiasm this week for Charter Communications after it reported strong Q4 results. It would become the No. 2 cable operator following a Comcast-TWC merger, the result of a deal with the cable giant to swap and acquire some of its systems. But Charter also would be next in line to buy TWC if the arrangement with Comcast collapses.
“The market may well like this result even better,” Moffett says. If the FCC and DOJ block Comcast, then “the prevailing narrative” is that “Charter will sweep in and buy TWC for a huge discount, and that they will proceed to roll up the whole industry from there.”