Will the FCC Allow These 2 Large Merger Attempts?

The FCC can be quite a buzz-kill to acquisition hopes, a fact that could prevent merger plans between Dish Networks, DirecTV, Comcast, and Time Warner Cable.

Apr 1, 2014 at 11:00AM

The merger between Comcast (NASDAQ:CMCSA) and Time Warner (NYSE:TWC) is old news, but last Thursday's news that Dish Networks (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) are entertaining merger talks is a new one for investors to digest. For the last five years, investors have been asking for a Dish and DirecTV merger, and with Comcast being confident in its bid for Time Warner, both Dish and DirecTV might feel good about their chances to finally merge.

However, the Federal Communications Commission, Department of Justice, and other regulators might have other plans, much like they did with AT&T (NYSE:T).

The FCC can be ruthless
If the FCC thinks that an acquisition or merger creates an unfair advantage or is bad for the free-market and jobs, then it will block the attempt. It doesn't matter how high the stock has traded in respect to the attempt or the size of the breakup fee. In many ways, the FCC can be ruthless, and rarely changes its mind.

For a good example, just look at AT&T. It tried to acquire T-Mobile, but the FCC rejected the attempt. As a result, AT&T was forced to pay T-Mobile a $6 billion breakup fee, money that could've been used on infrastructure, buybacks, or a higher dividend.

Will the FCC strike again?
Thankfully, Comcast's $45 billion takeover offer of Time Warner has no breakup fee. However, The New York Times did note the likelihood of a reverse termination fee of around $1.35 billion, which would be relatively small, considering what AT&T had to pay. So, the fundamental risk of the deal falling apart is somewhat low. The risk of an FCC merger block might be much higher, however.

AT&T and T-Mobile would've combined the second-largest and fourth-largest national carriers, and there is a wide gap between Verizon and AT&T, and then Sprint and T-Mobile, in terms of subscribers. If Charter Communications is successful in acquiring Time Warner, it would combine the No. 1 cable operator with the No. 2 cable company, making its chances of success relatively low.

In regards to Comcast and Time Warner, a merger would create a single company that would own nearly half of the triple-play services -- phone, Internet, and cable -- in the U.S. Then, with a combined 30 million subscribers, Charter would own 30% of the pay-TV market, which may not bode well with regulators.

With all things considered, it doesn't look good for Charter.

What about Dish and DirecTV?
To be fair, no set merger or acquisition price has been set, and investors should note that talks are only in their infancy. However, like Comcast and Time Warner, a DirecTV and Dish merger would be combining the No. 1 and No. 2 players in the large satellite business, where each company is the other's most significant competition.

Clearly, if the FCC and local regulators allow a Comcast-Time Warner merger, then DirecTV and Dish will have a lot of bargaining power. The problem is that, with content prices rising, Dish and DirecTV are very competitive on pricing. With the FCC's job being to determine how an acquisition affects the consumer, it seems reasonable that a merger would ultimately be bad for consumers in terms of paying for content.

In the end, this fact makes a DirecTV and Dish merger unlikely, which also applies to Charter and Time Warner.

Final thoughts
If we assume that all four of the noted companies have a tough road ahead in mergers and acquisitions, the real question is how this affects you, the investor.

Since Feb. 12, the day of Comcast's announced acquisition, shares of Comcast have fallen 8%, while Time Warner is trading with gains of only 2%. Essentially, Time Warner has lost nearly all of the $7 billion in market capitalization it gained after the announcement, which might be a reflection of pessimism surrounding the attempt. Comcast's offer is also all-stock, meaning investors are wary of holding a stock where 34% of its market cap is being used as an acquisition. Overall, if the deal fails to materialize, Comcast investors might benefit as the stock recoups its losses.

On the other side, Dish and DirecTV have gained 7% and 5%, respectively, since the news leaked of merger talks. If such a deal fails to materialize -- or if the Time Warner deal falls apart -- both stocks could lose the gains that were created from the leak, as these gains came in response to the merger speculation alone.

If we assume that the FCC will not allow either merger, Comcast looks to have the most to gain as it recovers from losses. Meanwhile, Dish and DirecTV could fall the most.

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