Comcast and Time Warner Cable Merger Faces Stock Shock Dilemma

Comcast Corp. (NASDAQ: CMCSA) is set to get even larger in cable if it is able to get the deal done with Time Warner Cable Inc. (NYSE: TWC). It has been nearly two months since the deal was announced, but now Comcast’s weak share price – close to a 10% drop – is coming up as an issue which could impacting the Time Warner holders. Ultimately, this could scuttle the buyout or could allow another buyer to swoop back into the fray.

What Time Warner Cable shareholders now have to consider is that the price of almost $159 at the time the deal was announced now translates to around $144 per share. That has pulled Time Warner Cable shares to $137.55 as of Tuesday. Comcast’s 52-week high of $55.28 compares to a closing bell price of $49.93 on Tuesday.

Regulatory hurdles also likely account for part of the current share discounting. Comcast also is not likely to get a vote until late in the spring or early in the summer. That gives stock market risk for Comcast specifically and also brings systemic market risk.

The big question is whether this will give Charter Communications, Inc. (NASDAQ: CHTR) a chance to finally get an opportunity to be heard. Charter had reportedly been shut out, but it faces similar issues as Comcast – its stock peaked at $144.04, and shares are down more than 12% to $125.64 even after rising almost 2% on Tuesday.

Charter’s most recent offer was $132.50, between cash and stock. The Comcast deal comes without a collar that would require an additional number of shares to be contributed if the price were to fall beyond a certain amount. Also, John Malone’s Liberty Media Corp. (NASDAQ: LMCA) owns about 26% of Charter, and now Liberty is in a break-up of its own.

Another risk is that the S&P 500 Index hit a new all-time high on Tuesday. If Comcast’s discount from its peak is 9.7% as of now when the market is at an all-time high, what happens if the broad market takes a “Sell in May and Go Away” attitude? Can they convince Time Warner Cable shareholders to accept even less, or will they have to bump their offer? Will Comcast’s rivals try to come in and steal the show in the final hours?

Comcast may try to boost its stock on its own via stock buybacks. Whether that works is up to the market, if it comes into play. Another issue is that Comcast could make an additional cash contribution rather than worry about its share price.

A 10% sell-off should not be the end of the world to most investors. Still, in a stock-deal buyout 10% may be worth a serious fight.