Finance

What’s Next If Charter-TWC Implodes

Five Ways the Industry Could Change If the Mega-Deal Isn’t Done 3/07/2016 8:00 AM Eastern
TakeAway

A letter from Senate Minority Leader Harry Reid has cast a shadow over the pending Charter-Time Warner Cable merger.

Charter Communications’s $78.7 billion merger with Time Warner Cable was expected from the onset to sail through the Federal Communications Commission approval process — unlike an earlier deal between Comcast and TWC that was abandoned because of regulatory concerns.

 

Lately, though, the combination of the second-largest cable operator (TWC) and the third (Charter) has drawn concern from state and federal officials who see the pairing as a means to concentrate power in the broadband industry. If the deal is approved, the new Charter would have 18.2 million high-speed Internet subscribers. Coupled with Comcast’s 23.3 million customers, the two would control nearly two-thirds of all U.S. broadband homes with available speeds of 25 Mbps or higher.

 

After a flurry of correspondence between the FCC and Democratic congressional leaders citing concerns about the deal’s impact, a Feb. 29 letter from Senate Minority Leader Harry Reid (D-Nevada) to chairman Tom Wheeler was its biggest threat yet. In a sternly worded letter expressing concern that new Charter would create a broadband duopoly the agency should look at closely, he ended the missive with this: “A competitive broadband marketplace is the only circumstance that will drive this outcome and until such a marketplace exists, further consolidation may pose a significant risk to consumers.”

 

None of the legislators are calling for an outright rejection of the deal, and most of the concerns are from veteran critics of consolidation who wouldn’t be expected to immediately bless any combination of broadband players. But Reid’s letter casts a shadow on the approval process.

 

“This will be a difficult letter for the FCC and DOJ to ignore and at the very least is likely to lead to a meaningful slowdown in the approval process, which appeared to be moving along rapidly toward closing,” BTIG media analyst Rich Greenfield said in a blog post.

 

The FCC is working toward a late March decision on the deal. Other analysts are puzzled that legislators are risking maintaining the status quo by rejecting it. No deal means no deal conditions, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. And no conditions means no incentive to change.

 

Charter has already shown a willingness to compromise, and possible conditions being discussed center around various contractual relationships — like most favored nation clauses — and even a broadband overbuild condition that would require the new company to deploy high-speed Internet in markets where it does not now offer the service but a competitor does.

 

“The government has a chance to get something material from the TWC-Charter deal approval and I don’t believe they are dumb enough to blow it,” Wlodarczak said.

 

Still, in the increasingly unstable political environment of 2016, a deal implosion would irrevocably alter the industry in five distinct ways:

 

1. Comcast gets stronger, or is broken up: With its status as the No. 1 cable and broadband provider, and Nos. 2-3 not really allowed to get any bigger, Comcast would be the de facto — and permanent — king of the cable hill. The cable giant already had its best growth year in about a decade after abandoning TWC by focusing on organic growth. Comcast could use its programming clout to go over the top outside its footprint or use its broadband dominance to eliminate the competition inside its service territories.

 

By rejecting the combination of two companies that would be smaller than Comcast, is the government saying the No. 1 cable operator is too large? While most analysts believe it’s a long shot, political sentiment seems to be shifting away from a few dominant providers to several smaller ones that would nurture OTT development.

 

2. Charter gets weaker: With the government basically preventing them from gaining meaningful scale, Charter will have to focus on what it had originally planned before it set its sights on TWC — growing organically, although at a slower pace. And it will have to do that after paying TWC its $2 billion deal-breakup fee.

 

3. Time Warner Cable could emerge stronger: With its second major deal blocked by regulators, TWC could be in a prime position, flush with $2 billion in cash which could be used for operations or to fund share buybacks, and riding strong momentum from positive performance in the past four quarters.

 

4. John Malone must rethink his strategy: With Charter no longer hunting big M&A game, Malone will have to decide if U.S. M&A is worth pursuing with Charter or another operator, whether to focus his efforts on the international markets with Liberty Global (a possible Charter partner) or if he should just play wait and see.

 

5. The cable deal market disappears: The consolidation movement fueled by Charter grinds to a halt as the three largest cable operators won’t be allowed to get any bigger. Altice Group, which bought Suddenlink Communications and is in the process of acquiring Cablevision Systems, could make a play for TWC, but would face similar regulatory problems — it will be about the same size as Charter.

 

SIDEBAR: Broadband Domination

Legislators are getting increasingly concerned with the balance of power in the 70 million-customer U.S. broadband market, fearing that a combined Charter and Time Warner Cable would concentrate nearly two-thirds of broadband subscribers in two companies — new Charter and Comcast. (All numbers are as of the end of Q4.)

 

Company                                                  Broadband Customers

Charter . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.5 million

Time Warner Cable . . . . . . . . . . . . . . . . . .  12.7 million

Comcast . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 million

Total. . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . 41.5 million

SOURCE: Individual companies

Want to read more stories like this?
Get our Free Newsletter Here!