Introducing a New Wave of Consolidation in the Modern Cable Industry

Earlier this month, on the 13th February 2014, Comcast announced an agreement to acquire Time Warner Cable in an all-stock deal worth over $45 billion, leaving the two companies’ financial advisers standing to make between $50-75 million each on both sides. Marking a new wave of consolidation in the modern cable industry, the two behemoths share first and second places on the leaderboard of the top largest cable television providers in the USA.

Not too long before the announcement, Charter Communications had been eyeing up Time Warner Cable. However, Charter undercutted the price per share that Time Warner was looking for, around $160, by offering closer to $130. It was considered a done deal when Comcast came along and put the money, or more specifically stock, on the table.

On the day of the announcement, Comcast’s CEO Brian L. Roberts explained that the acquisition will set the combined entity up for future growth. But the combination will not likely affect the estimated combined 33 million consumers; the two companies do not compete with each other in any local markets. The deal is supposedly to close by the end of the year, subject to the approval of regulators, who could potentially disprove the deal on grounds such as increased negotiating power with cable networks.

In an effort to appease the antitrust regulators, it has been reported that Comcast will make divestitures of roughly a quarter of Time Warner’s customer base, which would bring the combined entity’s customer base down to around 30 million, keeping Comcast from maintaining no more than 30% of the national market share. However, unlike Charter’s largely debt-fueled offers, the Comcast-Time Warner Cable combination will accrue no additional debt and leave Time Warner shareholders with roughly 23% of the combined entity.

The deal could be considered transformative, happening just a year after Comcast’s acquisition of NBC Universal. Charter on the other hand, one of the country’s smaller cable television providers, seems to have missed its invitation to the party. However, it may well be a likely buyer of upcoming subscriber divestitures from Comcast, if all goes to plan and the deal does in fact officially go through. Charter will most probably look to pursue further consolidation through the acquisition of smaller cable television providers in the country too.

Aside from antitrust regulators, other threats to the closing of the deal include the possibility of shareholders of either company voting it down. The deal could also come to a halt if Comcast’s shares collapse, but neither of these possibilities are particularly likely. Since the NBC Universal acquisition went ahead, the chances are not too bad for Comcast. However, Washington may still decide to kill the deal, even just for the sake of consumers. Perhaps surprisingly, there is to be no break-up fee between the two parties, which might even suggest they themselves are not convinced the acquisition will go through, despite Time Warner’s CEO Robert Marcus arguing the very opposite.

Some speculators might even say that the entire bid is simply an elaborate attempt on Comcast’s part to prevent Charter from achieving a more competitive position in the cable industry, while on Time Warner’s part to try and fetch a more substantial offer from the more antitrust-immune companies such as Charter. But regardless of what actually happens, why would the $64.7 billion-revenue Comcast ever want to combine with the $22.1 billion-revenue Time Warner Cable anyway? One speculative answer to this question is as follows.

While Comcast and Time Warner, like other cable television providers, face very little competition in their respective local markets, they are all part of a much wider media landscape that is full of intense competition. Like their other counterparts, these two companies are operating in a very competitive environment, despite being local monopolies. The market for cable television is considered very mature and, with the advent of the internet and other substitutes such as Netflix, it might now be the time for cable television providers to either adapt or die.

To make a historical comparison, this could be compared to the situation in which record companies found themselves in one or two decades ago. With technology moving at a fast and aggressive rate, it might not be much longer until we as consumers will be able to watch what we want, when we want. Of course that is almost the case today, which suggests that the Comcast-Time Warner combination is really just a product of desperation to find synergies and create value. By combining the two companies, it is expected that as much as $1.5 billion of cost savings will be harnessed.

The problem persists though, which is that no matter how much consolidation occurs, video-on-demand services such as Netflix will no doubt continue to drag the cable and satellite TV operators down. Still, as already mentioned, consolidation seems to be the very nature of the modern cable industry and will likely continue on into the future for as long as it can. Comcast has historically maintained a particularly acquisitive presence in the industry and if this particular deal goes through, many more deals are thought to follow.

If Comcast manages to complete its proposed acquisition of Time Warner Cable, their increased negotiating power will likely serve as a catalyst for further consolidation among cable network owners. Since cable networks must negotiate with companies such as Comcast and Time Warner Cable, if the latter combine, the cable networks will be left in a much weaker position. The solution to this problem therefore is to consolidate themselves.

Discovery Communications not long ago proposed to acquire its rival Scripp Networks Interactive; such a deal could well have been worth north of $10 billion. Those close to Discovery were reported to have said that one of the primary reasons the deal was forgone, was the fact that Discovery felt it was already in a strong position to negotiate with the cable television providers. Perhaps then the real antitrust worry is not about consumers, but rather the content providers that complete the cable industry. But with rising content fees in recent years, it is not unlikely that Comcast and Time Warner will push for the deal to close on such a basis that increasing negotiating power will help to bring those fees down, which could in turn lower prices for consumers.

It goes without saying that no one can predict for certain what the future of the modern cable industry will look like. However, it is clear that further consolidation, subject to antitrust regulators, will continue in the cable television industry. Further consolidation however might not allow the participating companies to prosper, but rather to simply continue to survive in one of the most competitive and fast-paced sectors that is telecommunications, media and technology.

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