Comcast, Charter Negotiating Divestitures - Analyst Blog

Comcast Corp. CMCSA is exploring several options to get regulatory approval of its proposed acquisition of Time Warner Cable Inc. TWC. Recently, both the Financial Times and Reuters reported that Comcast is negotiating with Charter Communications Inc. CHTR to divest around 3 million video subscribers of the combined Comcast-Time Warner Cable entity.

In Feb 2014, Comcast reached an agreement with Time Warner Cable to acquire the latter in an all-stock deal valued at around $45.3 billion. Liberty Media Corp. LMCA, which controls a 27.3% stake in Charter Communications, was also aggressively pursuing the idea of Charter Communications taking over Time Warner Cable. However, it lost to Comcast in the bid.

The merged entity of Comcast and Time Warner Cable will have around 33 million pay-TV (video), 32 million high-speed broadband (Internet) and 16 million telephony (voice) subscribers. The deal is expected to face tough scrutiny and close monitoring by regulator, Federal Communications Commission (FCC) and is expected to close within a year.

In order to avoid antitrust restriction, 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. Several industry researchers have valued these 3 million subscribers between $18 billion - $20 billion.

The FCC may also ask Comcast to spin-off these subscribers as a separate entity. If Charter Communications takes over that part, it will create another formidable player in the U.S. cable TV market with the fourth largest subscriber base. Notably, Charter Communications currently has approximately 4.2 million subscribers.

We believe that this deal will benefit both the companies. Comcast can avoid antitrust measurers. The company already assures FCC that its merger with Time Warner Cable will not result in higher prices for cable TV and high-speed Internet packages. On the other hand, Charter Communications will achieve necessary scale to remain competitive in the intensely competitive U.S. pay-TV market.      

Currently, Comcast, Time Warner Cable, Charter Communications and Liberty Media, all carry a Zacks Rank #3 (Hold).