A Comcast-Time Warner Cable Merger Would Be Justified

Picture this: a mega merger of Comcast (CMCSA) and Time Warner Cable (TWC).

A proposal to merge the two largest domestic operators — which is sure to alarm uneasy cable TV subscribers and federal regulators — is the brainchild of Citigroup analyst Jason Bazinet. His exhaustive analysis in a new client report concludes that the controversial move could yield $2.7 billion in annual cost savings and $12 billion in synergies by combining the companies’ 78 million customers.

Although Comcast and Time Warner tell Bazinet no such discussions are underway, the veteran cable analyst insists a merger is “the most intelligent transaction” they could pursue in an increasingly competitive digital market.

Theoretically, Bazinet could be right. But the track record on successful big media mergers is grim, and Time Warner’s (TWX) botched, recently unwound union with AOL is the poster child.

Although cable subscribers generally grumble about poor service and government regulators historically restrict the industry, the threat of media monopoly is dissipating as more choice abounds. Telephone, direct broadcast satellite, streaming online video and other new digital options would continue to erode and challenge the cable companies’ combined 37 percent share of the pay TV market. Today’s coaxial cable king could be tomorrow’s dumb pipe.

Regulatory hurdles to such a merger “may be lower than most believe,” Bazinet contends. Comcast-Time Warner’s 37 percent market share is just beyond the 35 percent cable ownership cap recently nullified by a federal appeals court.

The potential tie-up also could provide “a natural counterweight to a Telco-DBS merger (should such a transaction happen sometime down the road),” Bazinet says. His other reasons to support a Comcast-Time Warner merger:

• It would simplify Comcast’s wireless strategy given the companies’ common equity interests in both Clearwire (CLWR) and Spectrum Co (SPEC). It also would support the cable operators’ new “TV Everywhere” initiative that extends subscribers’ content access online and on wireless devices.
• A larger cable footprint would afford greater cost efficiency and negotiating power over Telco and DBS rivals. The merged company could save 14 percent annually on program expenses that are escalating three times faster than inflation.
• An estimated $12 billion in merger synergies would offset most of Time Warner Cable’s $14 billion market cap.
• The combined entity would likely retain an investment grade rating even if Comcast pays all cash and a 35 percent premium for Time Warner Cable.

It appears Bazinet’s bold report was partly triggered by the percolating merger and acquisition market marked by Disney’s (DIS) recently announced $4 billion acquisition of Marvel Entertainment (MVL). Speculation also has resurfaced that General Electric (GE) could sell all or part of NBC Universal if Vivendi (VIVEF.PK) exercises an annual option in November to unload its 20 percent stake in the media company.

Time Warner, Comcast and other media-related companies with cash reserves are poised to buy assets at historically low multiples. Content-driven Time Warner has more than $9 billion in proceeds from its recent public spinoff of its Time Warner Cable unit. Time Warner CFO John Martin told a Bank of America-Merrill Lynch conference Wednesday the company is eager to invest in cable networks, video games and grassroots production. It would consider buying cable networks owned by NBCU and Scripps Networks Interactive (SNI). He was not asked about Bazinet’s Sept. 9 report.

Comcast, InterActiveCorp (IACI), Liberty Media (LCAPA), Microsoft (MSFT) and even Google (GOOG) are among the other cash-rich companies that could seek to acquire all or part of NBCU.

Since cable stocks are trading below their intrinsic value, making stock-based deals unlikely, Comcast would do well to “bulk up on more distribution,” Bazinet says. He estimates Comcast stock could trade up 15 percent on the news of a Time Warner Cable deal.

While many cable investors generally consider the smaller Cablevision (CVC) a more likely cable takeover candidate, Time Warner Cable makes a better economic fit with Comcast, he said, although together they could make a bid for Cablevision down the road.

Comcast COO Steve Burke acknowledged at the Bank of America-Merrill Lynch media conference Wednesday that his company wants to expand its cable system and content holdings through acquisitions. Although Burke downplayed the advantages of scale and doing a $50 billion acquisition, he added, “We would like to get bigger if the economics were right.”

Original Post in BNET

Disclosures: None.

Comments

[john1940:]

BS!!!!!! Picture Insanity. You've lost your way. The object of all business is to provide a product or service efficiently. Your case is one for creating a monopoly and merger fee for some investment bankers.

I have had experience with Time Warner, Comcast, and ATT. They represent the poster child and case for what's wrong with regulated monopolies. Their service and offerings are the poorest of any I experience. I've found that to get repair, an attempt to terminate your service and simultaneously request new service is sometimes successful. This response coincidentally is the first email I have sent in four days because of the third outage in one month with beloved ATT. By the way, I use ATT because I had Comcast/Time Warner and they were worse. So here comes more nonsense on the consumer so some bankers can get a merger fee.

Picture this. Open up communications to a free market and let anyone who wants to take the risk compete with these antiques. They'll be gone in sixty seconds with wireless distribution over existing towers or some other technology.

Sep 11 12:14 PM

[User 357705:]

If you FU Capitalists have only one company of every kind of business there is at least we won't have to listen to the lie that we're free to choose!

Sep 11 01:16 PM

[Hephasteus:]

This merger would be horrible for american consumers. Both those companies need to be carved into 4 smaller companies. They are thieves, liars, and do not serve their customers.

Simply google billing mistake comcast. Billing mistakes are instituationalized at these places. They need to be in jail.

Sep 11 01:21 PM

[casey00001:]

This won't happen for the same reasons Dish Network and Direct TV were not allowed to merge. Using your rationale, why not give everthing back to AT&T like it was in the Sixties?

Sep 11 01:57 PM

[springfield...:]

ya lol i wish it was PICTURE THIS : merge google and Microsoft
or better merge Siemens and GE

Sep 11 05:22 PM

[The-Stock-M...:]

As other comments have said, such a merger will very likely not pass regulatory scrutiny. Comcast already charges customers an arm and a leg. They ate up smaller cable companies that served apartment complexes in CA. Then jacked up the prices 3 fold and are serving junk channels for a hefty price. Not much competition especially since lots of apartments and condo-rentals don't allow satellite dish installation or charge hefty deposits for the same. Comcast knows this and milks its subscribers to the max. Imagine if they hold hands with another giant...

Sep 13 03:59 AM