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Wall Street Odds Lengthen On Comcast-TWC Merger - Broadcasting & Cable

Wall Street Odds Lengthen On Comcast-TWC Merger

Even with shift, handicappers are still counting on approval of megadeal by a slim margin
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While Las Vegas oddsmakers get set to grapple with NCAA basketball brackets, Wall Street preps for what may be a different kind of March Madness—Comcast’s attempt to buy Time Warner Cable. Several analysts have lowered their odds, while still arguing there’s a better-than-even chance of the sale getting past the Justice Department and the FCC.

Potentially working in the deal’s favor is the FCC’s recent decision to apply Title II regs to the industry, although opponents last week were trying to make sure it did not provide any momentum shift.

Comcast faces a dual-vetting challenge. The FCC and Justice are looking at what would be the combined company’s traditional cable subs, though Comcast is spinning off systems to Charter to keep the sub count below 30% of the U.S. But likely even more key to an FCC focused on broadband and the hold Internet service providers have over the Web is the combined company’s share of high-speed broadband subs.

The FCC is increasing its definition of baseline broadband speed to 25 MHz, at least for its definition of what constitutes advanced telecommunications deployment. That could penalize Comcast and TWC for providing high-speed service, since they would have a greater share of those subs than they did under the 4 Mbps downstream benchmark.

But analyst Paul De Sa with Bernstein Research believes that might be a miscalculation. He says that while reducing the size of the high-speed market does increase the combined company’s share, it also decreases the number of high-speed households it controls. “Comcast has a higher share of a smaller number of subscribers, reducing anticompetitive concerns,” De Sa said in a recent note to investors.

“While the FCC recently set a new number as an aspiration for advanced broadband [a number which more than 90% of Comcast customers are already receiving], they’ve set different thresholds for different proceedings,” said Comcast executive VP David Cohen. “The market for broadband is local, not national, and that’s the way the FCC and the DOJ have looked at it in past transactions. Even if you take it as a national market, because TWC has so many fewer customers on higher speeds than we do, the percentage increase when the companies combine is only 1%.”

Analyst Craig Moffett, who put the odds at 80%-20% for approval in January, was down to 70-30 last month and is now at 60-40. That was partly due to the FCC’s decision to boost the definition of high speed, which Moffett called “emblematic of a relatively anti-cable zeitgeist in Washington.”

FCC chairman Tom Wheeler has singled out ISPs as the potential blocking and degrading link in the Internet chain, with the incentive and opportunity to discriminate against both consumers and edge providers. Such perspective could shift the percentages further.

TITLE II BOOST?

The FCC could approve the Comcast-TWC deal with conditions that assured that its new Title II regs would apply to the largest ISP regardless of whether those rules are eventually thrown out once more by the D.C. court.

In addition, as part of the proposed Title II regime, FCC chairman Tom Wheeler has suggested the creation of a new complaint regime for interconnection issues, such as the long-standing Netflix complaint about having to pay for peering.

That regime could make the commission more comfortable with allowing a Comcast-TWC, particularly given the aggressive stance assumed by FCC Enforcement Bureau chief Travis LeBlanc, whose department would be empowered to investigate those interconnection complaints.

Bernstein Research analyst Paul De Sa sees Title II as a slight net positive for the deal. “The new rules provide a basic framework for preventing discrimination by broadband providers against Internet content,” he said. “In principle, therefore, if the rules work, post-merger Comcast will not be able to exploit the market power that opponents of the deal are concerned about.”

Meanwhile, an understandably less patient Comcast executive VP David Cohen said he hopes the Title II decision means the commission can get moving on the deal.

“Now that the FCC has put in place industry-wide rules on the Open Internet—which we’ll evaluate when we see the order—we expect they’ll turn to the pending transaction reviews, both ours and AT&T-DirecTV. We continue to hope for regulatory approvals early this year,” Cohen said.

Not so fast, said the Stop Mega Comcast Coalition, which last week circulated a white paper titled, “Net Neutrality Rules Are No Cure for Mega-Comcast.”

Comcast last month exercised an option to extend the deal’s breakup date to August.

While Las Vegas oddsmakers get set to grapple with NCAA basketball brackets, Wall Street preps for what may be a different kind of March Madness—Comcast’s attempt to buy Time Warner Cable. Several analysts have lowered their odds, while still arguing there’s a better-than-even chance of the sale getting past the Justice Department and the FCC.

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