Comcast Corp's proposed $45.2 billion takeover of Time Warner Cable Inc could face close scrutiny from U.S. antitrust regulators because of the deal's potential to reshape the country's pay TV and broadband markets.
The company resulting from the merger of the top two U.S. cable service providers would boast a footprint spanning from New York to Los Angeles, with a near 30 percent share of the pay TV market as well as a strong position in providing broadband Internet services.
The all-stock deal, announced on Thursday, would put Comcast in 19 of the 20 largest U.S. TV markets, and could give it unprecedented leverage in negotiations with content providers and advertisers.
The friendly takeover came as a surprise after months of public pursuit of Time Warner Cable by smaller rival Charter Communications Inc, and immediately raised questions as to whether it would be blocked by the Department of Justice or the Federal Communications Commission.
Time Warner Cable shares jumped 6.8 percent to $144.50, still substantially short of the $158.82 per share value that Comcast put on its offer, indicating investors' worries about regulatory clearance. Comcast shares fell 3.5 percent, cutting the per-share offer value to $154.
"I don't know if the deal is too big to fail to be approved but it is definitely too big to sail through either the Department of Justice or the FCC without serious, serious examination," said former FCC Chairman Reed Hundt.
"Only Comcast could have paid this price and the combined company, if approved, would tilt the balance of power at every negotiating table in media and content and broadband and equipment industries."
Comcast Chief Executive Brian Roberts said he was confident about getting the green light from regulators as the two companies plan to divest 3 million subscribers, so that their combined customer base of 30 million would represent just under 30 percent of the U.S. pay television video market. He said no decisions have been made on which markets to sell.
The new cable giant would still tower over U.S. satellite competitor DirecTV, which has about 20 million video customers.
Comcast argued that the acquisition would be beneficial to consumers in that it would roll out its more advanced cloud-based set-top boxes to Time Warner Cable customers. It also said the deal would eventually result in higher broadband speeds.
"Significantly, it will not reduce competition in any relevant market be because our companies do not overlap or compete with each other," Roberts said. "In fact, we do not operate in any of the same zip code."
The new partners are concentrated in different cities. Comcast would fill in its New Jersey and Connecticut portfolio with Time Warner Cable's New York City customers, for instance, and add major markets such as Los Angeles and Dallas.
Hedge fund manager John Paulson, whose Paulson & Co is one of Time Warner Cable's top 10 shareholders, called the merger "a dream combination."
If successful, the deal will be the second time in little more than a year that Comcast has helped reshape the U.S. media landscape after its $17 billion acquisition of NBC Universal was completed in 2013.
"The negative is that NBC Universal ownership further complicates regulatory approval with implications even for usage-based pricing," Wunderlich Securities Matthew Harrigan said in a research note.
Representatives for the U.S. Federal Communications Commission and the Justice Department could not be reached for comment.
Comcast's offer price is roughly what Time Warner Cable demanded from Charter and a 17 percent premium from the No. 2 cable provider's closing price on Wednesday. Charter shares slid 6.2 percent.
Comcast and Time Warner Cable expect to create $1.5 billion in operating savings, with 50 percent of those savings expected in the first year. The proposed deal will be accretive to Comcast, which plans to expand its stock buyback program to $10 billion at the close of the transaction.
Comcast is interested in advertising synergies it would gain by owning the New York City market as well as the opportunity to expand its business services unit, its fastest-growing cable division, to a larger footprint.
"For Comcast, adding New York and Los Angeles has advertising potential, along with Time Warner Cable's sports assets, which provides an acquisition target that is simply too compelling to ignore, especially with an (under-leveraged) balance sheet," said BTIG analyst Rich Greenfield.
The two companies expect to close the deal, which would give roughly 23 percent of the merged company to Time Warner Cable shareholders, by the end of the year. Unusually for a transaction of this size, there is no break-up fee.
Analysts noted that smaller cable operator Charter, which went hostile this week by nominating a slate of directors to replace the entire board of Time Warner Cable, could still be a candidate to acquire some of the assets to be divested.
Charter offered $132.50 per share in a cash and stock deal last month that was rejected as too low. Officials at the company did not respond to a request for comment.
Talks between Comcast and Time Warner Cable started about a year ago, but negotiations gathered pace in recent weeks, people familiar with the matter said. Time Warner Cable had told Comcast it considered Comcast to be its preferred buyer once Charter had approached them, the sources said.
Comcast had also been in talks with Charter about the possibility of carving up Time Warner Cable markets, but opted not to participate in a hostile situation, the people said.
Comcast also likely was attracted to Time Warner Cable's two regional sports networks in Los Angeles, where it has spent billions on local TV rights for LA Lakers basketball and LA Dodgers baseball.
The deal would be a coup for Time Warner Cable Chief Executive Rob Marcus, who just ascended to the top job on Jan 1. Filings show that the former mergers and acquisitions attorney is set to pocket $50 million if Time Warner Cable is sold and he is replaced while he is CEO.
J.P. Morgan, Paul J. Taubman, and Barclays Plc acted as financial advisors to Comcast. Morgan Stanley, Allen & Company, Citigroup and Centerview Partners are financial advisors to Time Warner Cable on the deal.
(This version of the story corrects the paragraph one stock symbol for Comcast. The error first occurred in Update 1.)
(Additional reporting by Alina Selyukh; Editing by Soyoung Kim, Edward Tobin, Ros Russell)