Comcast and Time Warner Cable confirmed Thursday that they will enter into a $45.2 billion deal to combine the nation's two largest cable companies, a mammoth proposal that will trigger close scrutiny from federal regulators.
Swooping in to top a competing bid by Charter Communications, Comcast will pay 2.875 of its shares to TWC shareholders. The companies' respective board of directors have approved the all-stock agreement, which will see all of TWC's 284.9 million shares acquired at a value of about $158.82 per share. Current TWC shareholders will own about 23% of Comcast's common stock.
"The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders," said Comcast Chairman and CEO Brian Roberts, in a statement. "In addition to creating a world-class company, this is a compelling financial and strategic transaction for our shareholders."
Ahead of the start to regular trading on Thursday, Comcast's shares advanced just over 2% while Time Warner Cable's pre-market stock leaped nearly 12%.
The transaction will generate about $1.5 billion in "operating efficiencies" that will add to Comcast's cash flow per share. With the shares exchanged, the merger will be tax free to TWC shareholders, the companies noted. The companies expect to close the deal by the end of 2014.
Consolidation in the cable industry has been anticipated in recent years, as pay-TV operators face challenges from content suppliers seeking higher fees and consumers emboldened by new video options online. TWC has had numerous customer service and operational issues that have hampered its reputation, exacerbated last year by its high-profile fight with and decision to drop CBS over retransmission fees.
On Thursday, Comcast sought to frame the deal as one in which customers will benefit from improved technology, enhanced resources and better execution. The combined company plans to bring "a superior customer experience within the highly competitive and dynamic marketplace in which we operate," Roberts said.
In most U.S. markets, consumers have an option of one cable service provider and/or satellite operators, Dish Network and DirecTV. Comcast and TWC's service markets generally don't overlap. But the combined company would serve nearly one-third of the U.S. pay-TV households and have enhanced leverage against cable networks, TV stations and independent content creators that want to be included in its lineup of offerings.
To assuage antitrust regulators, Comcast said it'll acquire TWC's 11 million cable TV subscribers but "divest systems serving" about 3 million. It'll result in Comcast adding about 8 million subscribers in the deal, bringing its subscriber total to about 30 million, it said.
TWC, whose markets include New York City, Southern California, Texas and the Carolinas, has about 15 million total customers, including those with video, data, business services, advertising clients and others that it supports through a partnership with BrightHouse Networks.
"A company of that size would arguably have de facto control of what content could and couldn't exist in the U.S.," wrote Craig Moffett, an industry analyst at Moffett Nathanson Research, in a report last year in anticipation of the two companies' merger. "A programmer that failed to get a distribution deal with Comcast arguably wouldn't be economically viable."
Comcast, which owns about 20% of the U.S. pay-TV market, is already the nation's largest Internet and cable TV provider, but it also owns NBCUniversal, a movie studio and several cable channels.
Critics of the merger were quick to voice their opposition. "It is simply dangerous for a large proportion of our nation's critical communications infrastructure to be in the hands of just one provider," said John Bergmayer, senior staff attorney at Public Knowledge, a consumer technology advocacy organization. "If Comcast takes over Time Warner Cable, it would yield unprecedented gatekeeper power in several important markets. An enlarged Comcast would be the bully in the schoolyard."
In addition to their own "TV Everywhere" platforms, Comcast and Time Warner Cable each have millions of broadband Internet customers, too. The new company might even have the power to sway new technologies developed in networking because of its size, Bergmayer says.
Comcast-TWC could also steer subscribers to their own content, and perhaps away from streaming services such as Netflix. Or it could simply demand more money from Netflix and other services -- a concern of many consumer advocates after a federal court struck down the Federal Communications Commission's open Internet rules last month.
And the combined company will have more clout in making deals for programming from the HBOs and Showtimes of the world. That could, in turn, cause retransmission fees for competitors to go up. "Basically, the deal will give Comcast unprecedented power in the media world," says Phil Swann, president of TVPredictions.com. "It will be able to dictate terms to both consumers and companies."
After the deal closes, the combined company's cable operations, to be led by current Comcast executive Neil Smit, will extend some current Comcast products to TWC customers in key markets, including its cloud-based set-top box and 50,000 video on demand TV titles.