Last updated: February 13, 2014 10:56 pm

Comcast and TWC throw down $42bn challenge

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Time Warner Ride Along As Profit Estimates And Ad Revenue Increases©Bloomberg

Comcast and Time Warner Cable threw down a $42.5bn gauntlet to Washington regulators on Thursday, with a deal that would create a pay television and broadband giant nearly seven times larger than any rival US cable operator.

The agreed, all-stock offer would bring together the two largest operators in an industry whose traditional video revenues face pressure from rivals ranging from Verizon to Netlflix, but whose growth and pricing power increasingly stems from its grip on America’s broadband infrastructure.

US pay-TV market

US pay-TV market
Cable comanies

The unexpected $158.82 per share offer from Brian Roberts, Comcast’s chief executive, wrongfooted a rival bid from Charter Communications, whose $132.50 hostile pursuit of TWC had been backed by “cable cowboy” John Malone’s Liberty Media.

Mr Roberts, who conducted negotiations from the snowfields of Sochi, where he is overseeing the Comcast-owned NBC network’s Winter Olympics coverage, defended the deal as one that would create economies of scale that would spur TV and internet innovation.

Shares in TWC closed on Thursday at $144.81, up 7 per cent on the previous day’s close but well below the $158.82 per share headline price of Comcast’s offer because of expectations that the deal will face a lengthy antitrust battle.

Analysts said the combined company could control about a third of the US pay-TV and broadband markets.

Michael Copps, a former Democratic member of the Federal Communications Commission, said the deal would turn the “already oversized Comcast empire into a colossus” that would leave consumers paying more for declining service.

“This is so over the top that it ought to be dead on arrival at the FCC,” he said. The House judiciary committee said it would hold hearings and Al Franken, a Democratic member of the Senate judiciary committee, told CNN the TWC acquisition would hurt competition and consumers.

But Mr Roberts said his company was prepared to divest 3m subscribers to satisfy regulators.

Some large shareholders applauded the deal. Paulson & Co., the hedge fund that owns 6m shares of TWC, branded it a “dream combination” that “delivers full value in an all-stock deal from the most capable acquirer.”

Shares in Comcast, which also expanded its share buyback programme to $10bn, ended Thursday 4.1 per cent lower at $52.97, reducing the value of its bid. The offer includes no break fee, raising the possibility of either side walking away.

Charter’s shares fell more than 6 per cent. One person close to Charter said it felt “duped” by Comcast’s behaviour, adding. “Why did they wait until we had gone hostile before showing their colours?”

Time Warner / Comcast

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Mr Roberts said Comcast-TWC would “not reduce competition in any relevant market” because the two companies did not overlap “in any of the same zip codes.”

Consumer advocates called the deal “disastrous” for the unprecedented market power a combined company would have over TV, voice and internet services. They fear that the company could increase prices and exert undue influence over people’s access to media.

“Americans already hate dealing with the cable gu– — and both these giant companies regularly rank among the worst of the worst in consumer surveys,” said Craig Aaron, chief executive of Free Press, a Washington-based consumer advocacy group. “But this deal would be the cable guy on steroids – pumped up, unstoppable and grasping for your wallet.”

Comcast is the largest cable operator in the US with 53m total customer relationships and a $143bn market capitalisation. TWC has about 15m total customers and a market capitalisation of $37.6bn.

US cable industry
Number of basic video subscribers (m)
Comcast 22.00
DirecTV 20.08
Dish Network 14.06
Time Warner Cable 12.22
Verizon Communications 4.73
Cox Communications 4.54
AT&T 4.54
Charter Communications 4.16
Cablevision Systems 3.20
Bright House Networks 2.01
 Source: National Cable and Telecommunications association (2012)

The companies said the deal would generate operating cost savings of $1.5bn, with half created in the first year.

Comcast may have been emboldened to offer an all-share deal, traditionally less appealing to investors than a cash bid, because of the substantial overlap between its shareholders and those of Time Warner Cable. Seven institutions are in the top 10 holders of both companies; 14 investors are common to the top 20 holders of both.

Additional reporting by Stephen Foley

How they compare
  Comcast Time Warner Cable
Market cap $143.4bn $37.6bn
Revenues (2013) $64.7bn $22.1bn
Operating income (2013) $13.6bn $4.6bn
Net income (2013) $6.8bn $1.9bn
TV customers 21.7m 11.4m
Share price return since start of 2010 228% 227%
Source: companies; FT
Note: Market capitalisation as of February 12 2014. TV customer numbers as of end of 2013. Net income is adjusted for factors including non-controlling interests.

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