Comcast/TWC Unraveling Could Spawn M&A Flurry, Analysts Say

The opposition that led to Comcast’s withdrawal Friday of its proposed buy of Time Warner Cable is a sign of a tough regulatory environment for transactions, yet the dissolution is likely to lead to a flurry of smaller deals, cable analysts, brokers and industry officials said in interviews. Analysts see a second Charter Communications bid for TWC as the next logical step. Despite FCC Chairman Tom Wheeler’s denunciation of the Comcast /TWC transaction on Friday as “an unacceptable risk to competition and innovation,” deals between lesser companies aren’t expected to arouse FCC opposition, the analysts said.

New Street Analyst Jonathan Chaplin pointed to cable stocks’ health following the deal’s collapse as a sign that Charter/TWC or other cable mergers and acquisitions aren’t likely to go the way of Comcast/TWC. “Cable stocks are not down,” Chaplin said. “The market believes we’re going to see deals.” Charter declined to comment.

Statements from Wheeler and the Department of Justice on the deal’s collapse cited its possible effect on online video as a reason for regulators’ opposition, Chaplin said. Since online video is doing well in the current market with Comcast at its present size, regulators can’t argue against deals that create cable companies smaller than Comcast is now, he said. “Any deal Comcast-size or less won’t have a problem." Charter's absorbing TWC or going ahead with its pre-Comcast/TWC collapse plans to acquire Bright House would still fall under that line, Chaplin said. “Liberty and Charter have been clear that if the Comcast TWC deal broke, they would be back and look to acquire TWC,” FBN Securities emailed investors. John Malone's Liberty Media is a Charter investor.

Comcast’s withdrawal of Comcast/TWC doesn’t automatically end a review of the deal at the California Public Utilities Commission, said Media Alliance Executive Director Tracy Rosenberg. The CPUC’s review of Comcast/TWC, along with a review by the New York Public Service Commission (PSC), were anticipated to be extremely thorough (see reports in the Aug. 14 and Aug. 18, 2014, issues). Many California-based public interest groups, including the Media Alliance, recently had rallied behind a proposed decision from CPUC Commissioner Mike Florio to reject the deal. Florio’s proposed decision was an alternative to an earlier proposed CPUC decision approving Comcast/TWC with 25 attached conditions, which met with objections from Comcast and other companies associated with the deal (see 1504130046).

Rosenberg said she and other public interest advocates met with CPUC officials Thursday, after early reports about Comcast’s withdrawal, to discuss the commission’s path forward on its review. The CPUC can choose either to accept Comcast’s formal withdrawal from the transaction, move forward with its review or act on a hybrid of those two options. A hybrid end to the CPUC’s review would involve accepting Comcast’s withdrawal while simultaneously issuing a report outlining its findings on issues with the deal, Rosenberg said. Public interest groups are urging the CPUC to at least take the hybrid approach because many of the issues that led to public interest criticisms of Comcast/TWC could recur in later proceedings, Rosenberg said. A CPUC spokesman didn’t comment on the commission’s plans for its Comcast/TWC review. The New York PSC’s future actions on its review of the deal “will be in response to formal notification, and we will await such notification before making any decisions,” a spokesman said.

With the end of the Comcast/TWC deal, Bright House has become a desirable acquisition, said a cable banker. It could set up an “auction” between Charter and TWC to raise its price, the banker said. Charter is in a good position to make deals because it has been acquiring a great deal of financing in preparation for the Bright House deal, said the banker. The removal of the Comcast deal “probably creates a more competitive market” for cable transactions, said Mediacom Vice President-Legal Affairs Tom Larsen.

Deals between smaller cable companies won’t run into the same regulatory wall as Comcast/TWC because they won’t create the same issues, said analysts. Comcast/TWC “had a lot of unique circumstances,” said Public Knowledge Senior Staff Attorney John Bergmayer. Charter and most other companies don’t own content or have the scale of control over broadband that Comcast did, and won’t trigger the same regulatory reaction, said analysts. Comcast also had raised concerns at the FCC, where some felt it hadn't fulfilled its obligations connected with its acquisition of NBCUniversal, we were told.

Some analysts suggested that the tough regulatory response could in fact hurt future deals. For example, Comcast/TWC “didn’t cross any red lines,” said Goldin Associates Managing Director Armand Musey. The rejection shows the FCC won't hesitate to block M&As, which could chill future deals, Musey said.

Comcast isn't likely to be an immediate participant in any flurry of M&A, analysts said. The DOJ and FCC reaction to the TWC deal will make Comcast cautious about any transaction involving an increase in its video subscribers, Chaplin said. “Today, we move on,” Comcast CEO Brian Roberts said in a statement announcing the deal’s collapse. “We structured this deal so that if the government didn’t agree, we could walk away.” Avoiding growing too large doesn’t leave Comcast completely out of the mix, Chaplin said. Comcast could engage in subscriber swaps in Los Angeles and New York with Charter if Charter were to acquire TWC, Chaplin said. Such swaps were part of the plan for Charter’s failed attempt to buy TWC before the Comcast deal, he said. The U.S. regulatory environment could lead Comcast to pursue opportunities overseas, wrote MoffettNathanson analyst Craig Moffett. “For all intents and purposes, their M&A ambitions would be on ice in the U.S.”

Comcast’s leaving the deal has “negative credit implications” for the company, Moody’s Investors Service emailed investors. The deal would have given Comcast a larger footprint and made it more competitive, Moody’s said. The FCC and DOJ opposition raises questions about whether Comcast will be able to grow in the future, Moody’s said. “Regulatory risks to the sector as a whole are now much higher than they were before,” said Moffett.