Comcast Corp. (NASDAQ: CMCSA) and Time Warner Cable Inc. (NYSE: TWC) know they will have to part with some parts of the companies if the proposed merger is going to receive regulatory approval. Just which bits stay and which bits go isn’t decided yet, but the two are clearly thinking it over.
According to a report in the Financial Times, the two companies are currently talking to Charter Communications Inc. (NASDAQ: CHTR) about selling some of Comcast-Time Warner’s assets to Charter for as much as $20 billion. The FT claims among the options being discussed are a sale of subscribers to Charter or a deal where Comcast-Time Warner set up a spin-off and sell Charter a significant minority position in the new company. Some combination of the two is also being considered.
Now why Charter would want to give aid and comfort to Comcast is a reasonable question. After all, Charter had its own offer on the table for Time Warner and no expectation that Comcast would show up with a higher bid. Charter, backed by cable veteran John Malone, was clearly surprised by Comcast. Charter would very probably want at least a half-pound of flesh in order to help Comcast get regulators to go along with the merger that will combine the two largest U.S. cable operators into a single behemoth.
Comcast has said it would sell off some 3 million subscribers if the merger is approved. It has valued those subscribers at a total of $17 billion. The deal was originally valued at $45.2 billion, but Comcast’s share price has fallen 11.2% since the deal was announced. So, the deal is now worth about $40.2 billion, based on Comcast’s Thursday’s close of $49.10. Because Time Warner has about 12 million cable subscribers, these particular subscribers must be gold-plated. Adding 3 million subscribers to Charter’s total of around 4.5 million still leaves the company a distant second to the new giant which will have nearly 30 million cable subscribers, about a third of the total U.S. market.
And the fight over cable subscribers is not even the main event. Comcast-Time Warner will control about 40% of all U.S. broadband subscribers and that’s where the growth is. Cable subscriber numbers are falling in part because of the rise of video streaming. Giving up 3 million subscribers it is likely to lose anyway is not much of a price for Comcast-Time Warner to pay.
Charter should also insist on a significant portion of the combined company’s broadband subscribers. Regulators should also reject any scenario that includes a minority position for Charter in a spin-off company from Comcast-Time Warner. That divvies up the profits, but does nothing to diversify industry ownership.