Don't Fear the Comcast (Nasdaq: CMCSA)-Time Warner Cable Deal

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The proposed $45.2 billion Comcast-Time Warner Cable deal will create a colossus within the cable industry bound to fill both consumer groups and regulators with anxiety, but it's not as scary as it looks.

Sep 23 12:12 PM
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Price: 55.16 | Ch: -0.70 (-1.3%)

Time Warner Cable
Sep 23 12:12 PM
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Price: 148.61 | Ch: -2.00 (-1.3%)

The announcement of the marriage between the nation's two largest cable companies came late Wednesday. The deal calls for Comcast Corp. (Nasdaq: CMCSA) to pay $158.82 per share for Time Warner Cable Inc. (NYSE: TWC) in an all-stock deal that represents a little more than a 17% premium over Wednesday's closing price of $135.31.

The deal also effectively put an end to a long-running attempt by Charter Communications Inc. (Nasdaq: CHTR) to acquire Time Warner Cable. Last month, Time Warner rejected an offer of $132.50 a share as "grossly inadequate."

There's no doubt the deal is a huge win for Comcast.

"This leaves Comcast as the sole king of the cable hill," Richard Greenfield, an analyst with BTIG LLC, told Bloomberg News. "This is a game changer for Comcast."

The new, bigger Comcast will have about one-third of all cable customers in the United States, making it far and away the largest cable operator.

Wary of the inevitable regulatory scrutiny from the Federal Communications Commission (FCC), Comcast has already announced that it will divest itself of 3 million subscribers. That will ultimately give it 30 million and put its share of the pay TV market at 30%.

Consumer activists vowed to fight the Comcast-Time Warner Cable deal.

"This deal would be a disaster for consumers and must be stopped," Craig Aaron, president of Free Press, a media watchdog, told the Los Angeles Times. Aaron called for the Department of Justice and FCC to block the merger.

But that almost surely will not happen. Not only does the Comcast-Time Warner Cable deal make sense for both companies, it makes sense for a cable industry that today is part of a far different competitive landscape than it faced 20 years ago, or even 10 years ago.

Here's why the regulators will have almost no choice but to approve this acquisition...

Why the Comcast-Time Warner Deal Was Inevitable

Those who object to the Comcast-Time Warner Cable deal fear the power such a large company would have.

Consumer groups are worried that such a large company will be able to raise prices with impunity and that customer service will get even less responsive. (Comcast and Time Warner Cable have the two worst rankings among cable companies in the American Customer Satisfaction Index.)

And regulators may be concerned that Comcast is becoming too great a force in the industry, particularly since its acquisition three years ago of NBC Universal, which gives the company control over some content as well as delivery.

But Comcast has good reason to believe the deal will get approved - and it should be.

First, Comcast and Time Warner Cable do not compete with each other in any market. But they do both compete with other pay TV providers, most notably DirectTV (Nasdaq: DTV) and telecom companies AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).

And tech titans like Google Inc. (Nasdaq: GOOG) have also been testing the waters.

So the rapid growth of the telecoms in the pay TV market, and their national reach as opposed to the regional nature of the traditional cable companies, means the Comcast-Time Warner Cable deal is a lot less dramatic than it may appear.

In fact, this won't be the first time Comcast has about 30% of the market, as Chief Executive Officer Brian Roberts pointed out on CNBC.

"Ten years ago, when we bought AT&T [Broadband] and Adelphia, we were at 29.5%, about the same number," Roberts said. "So in the 10 years, all that intensified video competition, and other competition, brings us right back to where we were 10 years ago."

So not only is the Comcast-Time Warner Cable deal nearly certain to clear regulatory hurdles, it probably signals a new wave of consolidation within the cable industry. Smaller players simply won't be able to compete.

This means investment opportunities ahead.

The companies said the deal would generate $1.5 billion in savings and increase Comcast's free cash flow. Comcast also said it would buy back an additional $10 billion of its own shares.

Investors reacted as they often do after such deals are announced, by selling the buyer and buying the seller. Comcast stock was down about 4% in midday trading, while Time Warner Cable was up 6.6%.

Are you affected by the #Comcast-Time Warner Cable deal? How do you think it will affect the pay TV industry? Make yourself heard on Twitter @moneymorning or Facebook.

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