Why Charter's $55 billion TWC bid may pass muster
Charter Communications (CHTR) believes it can succeed where a bigger rival failed.
Just a month ago, cable giant Comcast (CMCSA) dropped its attempt to buy Time Warner Cable (TWC) amid regulatory pushback. Charter, in announcing its own deal to buy the second-biggest U.S. cable company, will create another cable and Internet giant. So what's different for Time Warner Cable the second time around?
The main difference is that the combination of Charter Communications and Time Warner Cable will have a much smaller footprint than the ill-fated Comcast deal. The "New Charter" will serve fewer than 30 percent of the country's broadband customers and about 17 percent of cable-television subscribers, or roughly half of the market share that a combined Comcast-Time Warner Cable would have controlled. Charter executives also stressed that the deal wouldn't reduce competition in any market, and that the company owns no programming assets, unlike Comcast's NBC Universal unit.
The Charter-Time Warner Cable deal "should be approved," New Street Research analyst Jonathan Chaplin wrote in a research note on Tuesday morning. "The deal does not pose the same harm" that concerned regulators with Comcast's proposed merger, he added.
The complicated deal involves Charter merging with smaller Bright House Networks LLC for more than $10 billion. Charter will provide $100 in cash and shares in a new public parent company that's equal to 0.5409 shares of Charter for each outstanding share of Time Warner Cable. The resulting company will be called New Charter, the companies said.
Because Charter doesn't own content assets, it doesn't have a history of disputes with content companies such as Netflix, Chaplin pointed out. Comcast had butted heads with Netflix over streaming speeds, with the online video service complaining that the cable giant and other Internet providers had violated the tenets of Net neutrality by providing poor video quality to customers who didn't pay up.
Those issues were among the concerns of regulators, who worried that creating a massive cable giant through a merger between Comcast and Time Warner Cable would have "posed an unacceptable risk to competition and innovation, including to the ability of online video providers to reach and serve consumers," Federal Communications Commission chairman Tom Wheeler said last month when the merger was called off.
Regulators reportedly gave Charter executives a green light to proceed. The FCC's Wheeler called Charter chief executive Tom Rutledge and Time Warner Cable CEO Rob Marcus to tell them that any proposed merger would be evaluated on merit, and that the agency hadn't outright banned cable mergers, Bloomberg News reports.
Of course, that doesn't mean that Charter won't have hurdles to jump over to soothe regulatory and consumer concerns. For one, the motivations driving the merger hit a number of hot button issues, such as who controls the Internet and whether some customers should get preferential treatment when it comes to speed and access.
While Americans are still hooked into cable-TV, with the biggest cable companies claiming roughly 50 million household subscribers, two million homes canceled their cable subscriptions in 2013, with many instead opting to watch TV and movies through services such as Netflix and Hulu. That means that while demand for cable subscriptions is declining, there's an increase in customers willing to pay more for high-speed Internet.
Cable companies like Charter and Comcast are trying to adapt by not only creating new Internet services but by gaining scale in order to have more leverage with content providers such as Netflix and traditional TV companies like CBS, the owner of CBS MoneyWatch.
Those pressures are leading to a land-grab, with AT&T making a deal last year to buy DirecTV for $48.5 billion. That acquisition is still pending, with some opponents arguing that the merger would allow the combined business to have unfair influence on Netflix and other content providers.
For its part, Charter executives assured analysts and investors on Tuesday morning that they are confident they'll gain regulatory approval for the Time Warner Cable deal.
"We are a very different company than Comcast and this is a very different transaction," Charter's Rutledge said on the conference call. Time Warner Cable's Marcus added, "We're confident it's going to get done."