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Behind Comcast’s Failed Acquisition of Time Warner Cable

Behind Comcast’s Failed Acquisition of Time Warner Cable

What this Collapsed Deal Means for Consumers and the Industry

April 28, 2015

In 2014, the two biggest cable companies in the U.S. agreed upon a $45 billion deal in which Comcast would acquire Time Warner Cable (see A Breakdown of Big Telecom Mergers).

For Comcast, the goal was to help the company compete with satellite providers like DirecTV, wireless phone companies like AT&T, and streaming services like Netflix. And for Time Warner Cable, its owners would have received roughly 2.8 Comcast shares for each share they own, with Time Warner Cable valued at about $158.82 per share.

Yet the merger was faced with major hurdles: the least of which included major public opposition. Comcast and Time Warner Cable also needed approval from federal regulators at the FCC.

In the end, largely due to objections from these government agencies as well as the general public, Comcast decided to abandon the merger in April 2015.

 

History of the Deal

Leading up to 2013, Time Warner Cable’s earnings and stock had been slowly falling, leaving it ripe for a buyout.

The first opportunity arrived in early 2014, in the form of a highly-leveraged deal from Charter Communications (which had just recovered from bankruptcy five years prior).

Forbes described the deal as a risky offer: with $83 a share cash and $49.50 a share stock offer, Charter would go to market for $20 billion-plus in added debt and leave the new company with more than five-times EBITDA—not to mention the junk bond ratings.*

As a result, Time Warner Cable ultimately rejected Charter’s offer. CEO Rob Marcus then convinced Comcast to enter the bid by agreeing to drop a reverse termination fee, letting Comcast off the hook financially if the deal fell through.

Thus, in February 2014, an alternate merger plan was revealed between Comcast and Time Warner Cable. The deal was an all-stock $158 a share offer to achieve below two-times EBITDA, which would ultimately create more than $10 billion in annual free cash flow, giving the merged company spending flexibility.*

Eventually, due to the size of cost synergies and dividend increases, Time Warner Cable’s shareholders agreed to the merger.

 

Public Opposition

The prevailing opinion in the eye of the American public was that Comcast—the largest cable provider in the U.S.—was essentially aiming for a monopoly of the industry.

In theory, this would allow the company to “throttle the broadband speeds of choice-constrained users, jack up prices, and strong arm content providers at the negotiating table,” despite antitrust issues and the FCC’s strict regulations.*

However, Forbes argues that alternatives to the dissolved deal may be less positive than expected.

 

What Does This Mean for You?

The deal collapse means a multitude of things for the cable industry and for its customers.

For a start, according to Forbes, it means losing lower debt loads and extra money to soften falling subscription prices or added capital investment—leaving consumers at the mercy of “increasingly leveraged” carriers unable to handle the industry’s constantly changing nature and chronic spending.

At the very least, Time Warner Cable’s 15 million subscribers will have to wait anxiously for the next installment in this story, as their service quality continually diminishes.

On the bright side, however, experts say that the failed Comcast deal could set the stage for significant improvements in customer service and satisfaction at Time Warner Cable.†

 

Looking Ahead

Comcast’s departure leaves the floor open for other mergers—not to mention Time Warner Cable is in a better position (improved balance sheet and higher stock)—and many analysts are looking again to Charter for a better offer than last time.

Meanwhile, Charter also bid on Bright House Networks in March 2015, and experts predict that the company could conceivably acquire both Bright House and Time Warner Cable. This would result in net debt of more than $75 billion, EBITDA of $13.5 billion and year-end 2015 free cash flow of $1.6 billion.*

Forbes compares this cable industry drama to recent events in the wireless industry: When the FCC blocked AT&T’s bid for T-Mobile in 2011, it triggered other mergers (between T-Mobile and MetroPCS between Sprint, Clearwire and SoftBank, and between Verizon and Vodafone, to name a few).

And although this also began a pricing war between the four largest nationwide carriers (see A Price War Rages between Sprint and T-Mobile and Comparing Network Coverage in 2014), Forbes points out that balance sheets became improved rather than degraded.

All of this boils down to the fact that the future of the cable industry looks very uncertain—especially taking into account the industry’s ever-changing, high-spending nature.

So, while the merger’s death prevented the birth of a much-feared monopoly, consumers are left with the same lackluster cable environment as before.

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* Gara, Antoine. Why You Shouldn't Celebrate The Collapse Of Comcast's Bid For Time Warner Cable, Forbes. Forbes.com LLC.

† Stout, Hilary. Comcast-Time Warner Cable Deal’s Collapse Leaves Frustrated Customers Out in the Cold, The New York Times. The New York Times Company.