LOS ANGELES (AP) — With a single behemoth purchase,
Comcast is creating a dominant force in American entertainment and
presenting federal regulators with an equally outsized quandary: How
should they handle a conglomerate that promises to improve cable TV and
Internet service to millions of homes but also consolidates
unprecedented control of what viewers watch and download?
Comcast,
which was already the nation’s No. 1 pay TV and Internet provider, says
its $45.2 billion purchase of Time Warner Cable will provide faster,
more reliable service to more customers and save money on TV programming
costs.
If the acquisition is approved, Comcast will serve some 30 million pay TV customers and 32 million
Internet subscribers.
But
industry watchdogs say the deal will give the company too much power
and ultimately raise the price of high-speed connections.
"How
much power over content do we want a single company to have?" said Bert
Foer, president of the American Antitrust Institute, a Washington based
consumer interest group.
The all-stock deal approved by the boards
of both companies trumps a proposal from Charter Communications to buy
Time Warner Cable for about $38 billion. It also represents another
giant expansion following Comcast’s $30 billion purchase of
NBCUniversal, operator of networks like NBC, Bravo and USA, which was
completed last March.
Comcast says it will continue to operate
under conditions the government imposed when it approved that
transaction, including a requirement that it provide standalone Internet
service without tying it to a pay TV package and that it make
programming available without discrimination to other providers,
including online video providers. However, those conditions expire in
2018, and Comcast CEO Brian Roberts was not prepared to voluntarily
extend those into the future in a conference call with journalists.
"Those
Internet conditions would apply on Day One," he said. "How long that
goes is not something I want to speculate on, but many years at the very
minimum."
Roberts argued that the cable industry has been losing
TV subscribers for the last decade because of increased competition from
satellite TV providers such as DirecTV and Dish and telecom companies
like AT&T and Verizon. Despite gaining subscribers in the final
quarter of last year, the forecast is to lose more in 2014.
"It’s a
very competitive business," he said. "That being said, we’ve expanded
for consumers their capabilities and access to content in remarkable
ways."
While the provision of video is competitive, it is becoming
increasingly less important for cable operators as higher programming
costs cut into their profits. On the other hand, providing Internet
services is highly profitable and in many markets, cable companies offer
the best speeds available.
"In most places outside of a few big
metro areas, you’ve only got cable as the only game in town," said Craig
Aaron, president of Free Press, a public-interest group that focuses on
the media industry. "I don’t see there on their list of proposed
consumer benefits prices going down."
The deal is expected to close by the end of the year, pending shareholder and regulatory approvals
The
two companies already have strongholds in the major markets of New
York, Chicago and Los Angeles. Comcast has 22 million pay TV customers
but plans to divest 3 million after the deal closes. Time Warner Cable
will contribute 11.2 million customers.
The price amounts to
$158.82 per share for Time Warner Cable and is about 17 percent above
that stock’s Wednesday closing price of $135.31. It tops a Charter
Communications Inc. proposal to buy Time Warner Cable for about $132.50
per share.
Charter had pursued Time Warner Cable for months, but
Time Warner Cable CEO Rob Marcus consistently rejected what he called a
lowball offer, saying he would cut a deal for $160 per share in cash and
stock.
For a time, Comcast, which also owns NBCUniversal, stayed
in the background, waiting to purchase any chunk of subscribers that a
combined Charter-Time Warner Cable would sell off. Charter had planned
to finance its bid with $25 billion in new debt. As part of a plan to
pay off the debt quickly, the company considered selling off some of its
territories after a deal had closed. Time Warner Cable’s Marcus had
also balked at the huge debt burden the Charter takeover represented.
The
Comcast-Time Warner Cable combination’s total of roughly 30 million
customers is believed to be a level that won’t trigger the concern of
antitrust authorities. Divesting subscribers could help the deal get
approved more quickly.
Comcast is also taking the position that
because Comcast and Time Warner Cable don’t serve overlapping markets,
their combination won’t reduce competition for consumers. Comcast
operates in Chicago and mainly in Northeast markets that also include
Boston, Washington and its home base of Philadelphia. Time Warner Cable
has strongholds around its headquarters in New York, as well in Los
Angeles, Dallas and Milwaukee.
In many of those areas, the
combined Comcast/Time Warner Cable will face competition from rivals
AT&T and Verizon, which provide both pay TV services and Internet
hookups. Both AT&T and Verizon are growing quickly. They ended 2013
with 5.5 million and 5.3 million pay TV subscribers, respectively.
Time
Warner Cable shareholders will receive 2.875 Comcast shares for every
Time Warner Cable share they own. Once the deal is final, they will end
up owning about 23 percent of the combined company.
Comcast and
Time Warner Cable are expected to save $1.5 billion in annual costs over
three years, with half of that realized in the first year.
Comcast
also plans to add an additional $10 billion in share buybacks at the
close of the deal, on top of a recent plan to boost its share buyback
authority to $7.5 billion from $1 billion.
Conceding that it had
lost the takeover battle, Charter issued a statement Wednesday saying
the company "has always maintained that our greatest opportunity to
create value for shareholders is by executing our current business plan,
and that we will continue to be disciplined in this and any other
(merger and acquisition) activity we pursue."
Shares of Time
Warner Cable jumped 7 percent, or $9.46, to $144.77 Thursday morning
after the deal was announced, while broader trading indexes slipped less
than 1 percent. Comcast shares fell more than 3 percent, or $1.74, to
$53.50.
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