Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC) revealed plans to merge earlier today, and needless to say, this is going to change the scope of the industry dramatically. The largest cable company in the nation wants to merge with the second largest cable company.
Most expect that regulators will scrutinize the merger intently, but one of the very first things the two companies did on their conference call on the topic this morning was emphasize that it will not reduce competition. They said they don’t offer services in any of the same zip codes. As a result, they think regulators will ultimately approve the deal.
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Outlining the deal between Comcast, Time Warner Cable
As part of the deal, Comcast Corporation (NASDAQ:CMCSA) said it was ready to divest 3 million subscribers, giving them about the same national market share they had after the transactions with AT&T and Adelphia. Comcast will also acquire 100% of Time Warner Cable Inc (NYSE:TWC) shares in exchange for Comcast shares in a “share-for-share exchange equal to pro forma ownership of approximately 23% of Comcast.”
Each Time Warner share will be converted into 2.875 Comcast shares, which is probably why Comcast is down today and Time Warner Cable is up.
Why Comcast likes Time Warner
Comcast Corporation (NASDAQ:CMCSA) outlined a number of benefits for the proposed merger in this morning’s conference call. The company said the deal provides it with exposures to 19 of the top 20 markets and 43 of the top 50 markets. Comcast said it would improve the video, high-speed Internet and television service for customers of Time Warner Cable Inc (NYSE:TWC), while Time Warner Cable will make it possible to “serve regional businesses” they were unable to serve before.
In addition, the company said it would be improving efficiencies through the merger, which of course means that we could see some job cuts as a result of this. Business Insider took a closer look at the kinds of job cuts we could see as a result of the merger. They note that Comcast Corporation (NASDAQ:CMCSA) has about 136,000 employees, while Time Warner Cable Inc (NYSE:TWC) has about 34,000. If half of the efficiencies management mentioned, which is about $750 million, comes from job cuts and each cut saves the combined company $150,000, then the number of cuts could go as high as 5,000.
Analyzing free cash flow accretion
According to Comcast Corporation (NASDAQ:CMCSA), they believe the transaction will be accretive to free cash flow per share within the first year, excluding expenditures related to the transaction itself. Analysts Bryan Kraft and Preeti C. Doshi of Evercore provided their analysis of free cash flow accretion for the merger. They see 3% accretion by 2015, 10% the following year and 17% in 2017. They said the transaction is largely in lie with their expectations, particularly in terms of price and “operating synergies.” However, they noted that management’s guidance for capital expenditures is higher than they thought it would be.
They see a “dis-synergy” on the side of NBC Universal because Time Warner Cable Inc (NYSE:TWC) will no longer be an outside customer presumably paying more than Comcast Corporation (NASDAQ:CMCSA). They estimate that the impact will just be about 1% to affiliate revenue and be offset by revenue synergies at Time Warner Cable.
Addressing the regulatory risk
Comcast Corporation (NASDAQ:CMCSA) emphasized again later in the conference call that it doesn’t overlap in any markets with Time Warner Cable Inc (NYSE:TWC), so the merger doesn’t decrease competition. Evercore analysts didn’t expect Comcast to sell 3 million subscribers, but they think it will reduce regulatory risk, which is undoubtedly why Comcast decided to do it. Because of the merger proposal, the Evercore team raised their price target for Time Warner Cable’s stock to $175 a share and reiterated their Overweight rating on the stock.
Comcast Corporation (NASDAQ:CMCSA) also outlined some additional reasons they believe their merger with Time Warner Cable Inc (NYSE:TWC) will be approved by regulators. They also said there are a number of pro-consumer and pro-competitive benefits to be had from the transaction. Aside from the improvements Comcast will make to Time Warner Cable’s offerings, the company also said that standalone broadband service will become available in more places and content distributors will have “defined arbitration rights” for the Time Warner Cable programming which becomes part of the NBC group.