Confirming a long-standing rumor, Comcast Corp. (CMCSA - Analyst Report) has reached an agreement to acquire Time Warner Cable Inc. (TWC - Analyst Report), for which the official announcement is yet to come. Notably, Comcast and Time Warner Cable are the largest and second largest cable MSOs (multi-service operator) in the U.S.
The deal is likely to be designed as an all-stock acquisition. Comcast will offer approximately $159 per share of Time Warner Cable, which amounts to a total consideration of around $45.2 billion. Each share of Time Warner Cable will be converted into 2.875 shares of Comcast.
After the completion of the deal, the existing Time Warner Cable shareholders will hold about 23% of the merged entity. The deal is expected to close within a year, subject to regulatory approval and approvals of the shareholders of the both companies.
Just a month ago, Charter Communications Inc. (CHTR - Analyst Report) had offered $132.50 per share to acquire Time Warner Cable, amounting to a total consideration of approximately $37.3 billion. Liberty Media Corp. (LMCA - Analyst Report), which controls a 27.3% stake in Charter Communications, is aggressively pursuing the idea of the company acquiring Time Warner Cable.
However, the board of directors of Time Warner Cable rejected the bid as insufficient as it valued its owned assets at around $160 per share. Comcast’s present bid is very close to this expectation.
The merged entity will have around 33 million pay-TV (video), 32 million high-speed broadband (Internet) and 16 million telephony (voice) subscribers.
In 2013, the combined total revenue of these companies was approximately $86.8 billion and net profit was approximately $8.8 billion. Comcast is expected to derive a significant $1.5 billion of operating synergies from this merger of which 50% may be realized within the first year after merger.
The deal is expected to face tough scrutiny and close monitoring by the regulator, Federal Communications Commission (FCC). Although Comcast’s and Time Warner Cable’s operations overlap in very few U.S. markets, Comcast may assume near monopolistic power by installing better delivery mechanism, newly launched innovative products and the bundled offerings of its NBC Universal division.
According to sources, Comcast has decided to divest around 3 million Time Warner Cable video subscribers to maintain its total market share at 30% of the U.S. pay-TV industry.
We believe if the deal finally crosses regulatory hurdles, it will be a win-win situation for both the companies. Time Warner Cable, together with most of the cable TV operators in the U.S., is getting marginalized gradually by fiber-based video offerings of telecom giants and online video streaming services by low-cost operators.
However, Comcast is the only one notable exception, which added video customers. Thus, a union with Comcast will definitely help Time Warner Cable to regain its lost ground.
Similarly, Comcast will benefit from geographic expansion, significant operating cost synergies, which will boost its bottom line and free cash flow, and a unique combination of triple-play (voice, video and data) delivery and high-quality content distribution mechanism.
Currently, Comcast carries a Zacks Rank #3 (Hold) whereas Time Warner Cable has a Zacks Rank #2 (Buy).