We awake here in the US this morning to some “news” that had, to some extent, been predicted for a while; Time Warner Cable (TWC) was to be bought. The news part was that they are set to sell, not to original bidder Charter Communications, but to rival Comcast (CMCSA). The country’s two biggest cable providers will come together in a $45.2 Billion, all stock deal that follows months of takeover talks around TWC.
Charter’s initial offer of $132.50 per share in cash was rejected last month and they, in response, effectively put the deal directly to shareholders by putting together a whole slate of directors to replace the current board. This latest offer is equivalent to just under $159 a share, close to the level that the existing board demanded in response to Charter’s offer.
As always, the deal will be subject to regulatory approval. To facilitate that somewhat, Comcast also announced plans to divest itself of around 3 million subscribers in as yet unspecified markets. Even so, that approval could be a stumbling block as the new company will serve around 30 million customers, or around 30% of the US pay TV market, but for now, let’s assume that it goes through.
In the current environment a merger or buyout of two cable giants, it seems to me, makes sense. There is much talk of a shift in viewing habits to online and alternative providers. News last week that Apple (AAPL) has been buying up bandwidth has led to speculation that there may soon be another, formidable player in the TV market in some form or another.
The traditional TV companies, networks and cable operators, have realized that live events, and particularly sports, are the antidote to that. Acquiring such programming, however, is an expensive business, so size matters.
There have recently been several public spats as cable and satellite companies begin to flex their muscle in negotiations with network companies and here too, size matters. Comcast’s purchase of NBC Universal from GE (GE) a year ago was one very aggressive way of confronting that issue but that could only ever be a one-off; the other networks still have to be dealt with.
In general, then, it is hard to see a real downside to this deal for CMCSA in the long term, so what do we see the stock price doing this morning? Why, falling of course!
Don’t get me wrong, I completely understand why. The stock of Comcast is about to get diluted in a big way, so inevitably the shares will be worth less, but to some extent this will be offset by the company’s commitment to continue with its $10 Billion buyback program. All of this is priced in to this morning’s drop in CMCSA, but any pullback looks like a good buying opportunity to me. When a major acquisition is announced the stock of the buyer usually drops, but much of the time even the aggressor can easily underestimate the accretive value and synergies that come from such a deal.
I know that each deal is different and this one is in a completely different industry, but take a look, for example at the price action at the time of Thermo Fisher Scientific (TMO)’s acquisition of Life Technologies in April of last year and subsequently.
When that deal was announced there were some doubts about its value and TMO lost close to 5%. As you can see, though, it turned out OK.
I am sure that in this case the simple fact that Comcast’s offer is so close to TWC’s asking price causes some of the pessimism, on the basis that we all tend to over value our own; we all think our own spouse is good looking and our kids are smart. Here, though, I think that TWC are just aware that they have some valuable assets and that the price is fair.
There is also the feeling that in the modern world most economies of scale have already been achieved and, if anything, there is a tendency for companies to become unwieldy. In some sectors I believe that to be the case, but in cable TV, for the reasons above, I think there are significant advantages to size.
Once again all of this is based on the assumption that regulators agree, but if that is so then CMCA’s acquisition of TWC will probably look like a very smart move when we look back in 6 months or a year as they consolidate in New York, LA and other large markets and add revenue. When that time comes, today’s fall in CMCSA will look a little mystifying and the $53 price will look like a bargain.