Consolidation talk picks up
On Friday, November 22, 2013, news emerged that Comcast (CMCSA) was interested in a potential purchase of rival cable provider Time Warner Cable (TWC). After months of speculation that Charter Communications (CHTR) was pursuing a similar buyout, this news brought to light the potential for a competing bid for Time Warner, leading to a 10% spike in TWC shares to a new 52-week high of $132.92. All three companies belong to the iShares U.S. Consumer Services ETF (IYC), which tracks the performance of the Dow Jones U.S. Consumer Services Index.
While a possible bid from Comcast increased the value of Time Warner Cable in the perception of investors, several hurdles may stand in the way of a completed deal. Particularly, the combination of the two largest cable TV providers would result in a significant concentration of market share for the industry. The high level of concentration may raise the ire of government regulators, whose stamp is required to allow the combination.
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Merger approval hurdles
Merger law is governed by the Hart-Scott-Rodino Antitrust Improvements Act (the HSR), under which the Federal Trade Commission and the Department of Justice evaluate mergers for their impact on fair competition. By current law, all mergers that are valued above $66 million must receive approval to go forward. An entire field of investing, called merger arbitrage, is dedicated to taking bets on whether potential mergers will receive HSR approval.
Under HSR, the primary metric by which mergers are evaluated is market share. Higher market shares worry regulators because of their potential negative impact on open competition.
The pay-TV industry, defined by cable and satellite TV providers, has a total of 92.5 million subscribers domestically. Given Comcast’s number-one position with 21.6 million video subscribers and Time Warner’s 11.4 million subscribers, the combination would result in a newly dominant company boasting a 34% market share.
Because cable TV providers are similar to utilities in that customers have little ability to switch providers, this level of concentration will surely result in a lengthy review by government regulators. In particular, the Obama Administration has been vocal about more active use of anti-trust law to protect consumers. With this in mind, the jump in TWC shares following the news of the merger talks may have been premature. Going forward, the stock price will likely be at risk to any signs that such a merger may have difficulty in passing regulatory oversight.