Analyst: Comcast, Time Warner Cable Should Merge

Citigroup's Bazinet Cites 7 Benefits To Creating 37 Million Sub Behemoth

Mike Farrell -- Multichannel News, 9/10/2009 1:51:14 PM

Despite claims that the removal of the 30% ownership cap will have no effect on mergers and acquisitions in the cable space in the short term, Citigroup media analyst Jason Bazinet called for the mother of all cable deals -- the merging of Comcast and Time Warner Cable -- in a research note Thursday.
Even though the removal of the 30% ownership cap on cable companies appears to have opened the door for mega mergers, many analysts have said that the economic climate, all-time low cable valuations and the paucity of systems available for sale would dampen any major M&A activity in the cable space for quite some time. And even those who believe Comcast could buy a smaller operator -- like Charter Communications or Cablevision Systems -- have said that a Comcast/Time Warner Cable merger would be blocked by federal anti-trust regulators.
In his research note, Bazinet made the case for a combination of the No. 1 and No. 2 cable operators, claiming that a deal would create $2.7 billion in cost synergies - $1.6 billion in lower programming costs and $1.1 billion in other cost savings. Bazinet also claimed that the regulatory hurdles may be low -- even with 37 million subscribers (Comcast has 24 million and TWC 13 million) a combined entity would control only 37% of the pay television market. Currently, Comcast controls about 24% of the pay TV universe.
Aside from the cost synergies, Bazinet cited six other benefits to a deal -- both companies would maintain their investment grade credit ratings; a deal would counter escalating content costs; it would simplify both companies' wireless strategy; would limit the bidding war for further cable consolidation; and extend the cost advantage over satellite TV and the telcos.
For their part, neither Comcast nor Time Warner Cable have expressed any public interest in a deal. At the Bank of America Merrill Lynch Media, Communications & Entertainment conference in Marina del Rey, Calif., Wednesday, Comcast chief operating officer Steve Burke appeared more interested in content deals. He added that Comcast had no desire to enter into a big transaction. He also doubted the benefits of a big deal.
"We would like to get bigger if the economics were right," Burke said. "Its pretty hard for me to see how there would be synergies on the programming side or on the hardware side when you go from 24 million subscribers to 27 [million] or 30 [million].
At Thursday's session at the conference, Time Warner Cable chairman and CEO Glenn Britt declined to comment on the speculation.
Investors appeared mixed on the news - Time Warner Cable stock was up 3.5% ($1.35 each) to $40.61 per share in afternoon trading, while Comcast stock rose 20 cents each (1%) to $17.05 per share.