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Time Warner Cable Breakup May Help Sidestep Deal Scrutiny

By Alex Sherman, Edmund Lee and David McLaughlin
November 25, 2013 12:01 AM EST 5 Comments

A breakup of Time Warner Cable Inc., which Comcast Corp. and Charter Communications Inc. are said to be considering as part of a joint bid, would let the industry consolidate while potentially sidestepping regulatory hurdles.

Comcast and Charter have discussed the breakup scenario as an alternative to each making rival offers for Time Warner Cable, people familiar with the matter said last week. The move would resemble the joint purchase of Adelphia Communications Corp. by Comcast and Time Warner, which split up the company between them in 2006.

While Comcast has considered a solo deal for Time Warner Cable, that approach would combine the two largest cable companies in the U.S. and invite stricter scrutiny by the Federal Communications Commission and antitrust regulators. Such a merger would create a dominant company with almost three-quarters of the nation’s cable subscribers.

“A joint deal takes away all the issues of the transaction -- including regulatory concerns for Comcast -- and it makes it easier for Charter to get some financing since it’s not as large,” Vijay Jayant, an analyst with ISI Group in New York, said in an interview.

Justin Venech, a spokesman for Stamford, Connecticut-based Charter, declined to comment on the talks, as did John Demming, a spokesman for Comcast. Bobby Amirshahi, Time Warner Cable spokesman, also declined to comment.

Early Stage

The talks between Comcast and Charter have been preliminary, and a Time Warner Cable breakup is one option under consideration, the people with knowledge of the discussions said. Parts of Time Warner Cable would complement each company’s coverage area, increasing the appeal of the transaction, said the people, who asked not to be identified because the deliberations are private.

Comcast, which leads the industry in subscribers, is strong in places like San Francisco, Washington and its hometown of Philadelphia. Time Warner Cable -- No. 2 to Comcast -- serves its headquarters city of New York, along with Los Angeles, Dallas and other markets. Charter ranks fourth, with customers in St. Louis and other cities across the country.

Comcast and Charter will still have to argue to antitrust regulators that they can split up the assets and maintain competition in the industry, said John Briggs, a lawyer at Axinn, Veltrop & Harkrider in Washington.

No Cakewalk

“The idea would be they wouldn’t really eliminate competition,” Briggs said. “There would be two companies and not have a dominant company. It will get scrutiny. It will not sail through.”

Even so, there are fewer barriers than there used to be to a cable megadeal. In 2009, the U.S. Court of Appeals eliminated an FCC restriction preventing any U.S. cable provider from owning more than 30 percent of the nation’s total subscribers.

Time Warner Cable is emerging as an acquisition target amid renewed attempts to consolidate the industry. Companies are looking to bulk up to get more negotiating leverage with networks such as CBS Corp. and Walt Disney Co.’s ESPN.

Splitting up Time Warner Cable would let Comcast and Charter add users near markets they already serve, making regional advertising more effective, Jayant said. Charter could take Time Warner Cable’s markets in Los Angeles and North Carolina, while Comcast would absorb the New York and Dallas regions, he said. Comcast serves much of the Northeast, though New York is a large gap in its coverage area.

“Everybody wins, but no one wins big,” Jayant said.

Adelphia Split

When Comcast and Time Warner Cable acquired and broke up Adelphia in 2006, Time Warner gained 3.3 million customers and Comcast added about 1.7 million. Comcast used the deal to strengthen its presence in Florida, Massachusetts, Pennsylvania and Washington, D.C. Time Warner Cable bulked up its five major clusters of subscribers in New York, Texas, California, Ohio and the Carolinas. The two companies also traded customers in certain parts of the U.S. to make the deal more palatable.

AT&T Inc.’s failed $39 billion takeover of T-Mobile USA Inc. in 2011 has served as a cautionary tale for would-be suitors in the communications field. That deal, which would have combined the second- and fourth-largest wireless carriers, was opposed by both the FCC and the Justice Department.

If Comcast bought Time Warner Cable outright, it would create a company with 33.3 million cable customers. While the two parties don’t have many overlapping regions, the deal would set up another showdown with the FCC. Tom Wheeler, the FCC’s new chairman, has named consumer-rights advocate Gigi Sohn as special counsel for external affairs -- a sign that the commission may oppose deals that threaten competition.

Not Clean

A breakup isn’t a surefire way to assuage regulators, said Allan Grunes, an antitrust lawyer at GeyerGorey LLP in Washington and a former attorney with the Justice Department’s antitrust division.

“You’re still dealing with the largest firms getting larger,” Grunes said. “It’s still not going to be a clean deal from an antitrust standpoint.”

Charter, backed by billionaire John Malone, also is considering an independent bid for Time Warner Cable, people with knowledge of the company said. It has been in discussions with banks, including Barclays Plc, Bank of America Corp. and Deutsche Bank AG, about borrowing funds for an acquisition, according to the people. Without a partner, Charter would be attempting to swallow a much larger company: Time Warner Cable has an enterprise value of $61 billion, compared with $28 billion for Charter.

Stock Surge

The takeover speculation sent Time Warner Cable shares to a record high on Nov. 22, the most recent trading day, with the stock rising 10 percent to $132.92. Charter surged 6.1 percent to $134.66, and Comcast climbed 4.4 percent to $49.52.

Malone, whose holding company acquired a 27 percent stake in Charter in May, has pushed for more consolidation in the cable industry, saying it will help providers cut costs and get better rates from the networks.

He also has urged the cable industry to forge partnerships as a way to stave off competition from newer digital entrants such as Netflix Inc. and Amazon.com Inc. That would help companies develop universal technology standards and services, Malone has said.

“He’s been a proponent for both consolidation and confederation,” Jayant said. “With fewer, bigger players, you can get better cooperation.”

The merger talks have spurred speculation that Dish Network Corp. and DirecTV, the two largest satellite-TV providers, also could head toward the altar. Still, even if regulators approve a deal for Time Warner Cable, a satellite tie-up would be a harder sell, Jayant said. It would leave just one company in the industry.

“Satellite is different,” he said.

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Edmund Lee in New York at elee310@bloomberg.net; David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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