Forget Regulatory Risk: This Is What Can Sink the Comcast-Time Warner Cable Merger

While most had assumed regulatory concerns would be the biggest impediment to the megamerger, Comcast's falling stock price brings new problems ... and opportunities.

Michael Lewis
Michael Lewis
Apr 7, 2014 at 12:25PM
Technology and Telecom

Since its announcement in February, the Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL) merger has been one of the most talked about M&A deals in recent history, and for good reason. If it goes through, the agreement could easily ignite a wave of megamergers across the media industry, as competitors scramble to snatch market share and remain in the game against one behemoth of a cable business. The biggest concerns regarding the Comcast-Time Warner affair have centered on regulatory risk. And while regulatory risk is important, the deal may be in greater jeopardy due to another factor. With Comcast's stock price falling steadily since mid-February, Time Warner Cable investors are getting a worse and worse deal.

All but finished?
Time Warner Cable has been primed for a takeover -- the company's stronghold markets in areas such as New York City and Los Angeles are incredibly attractive, considering the mature pay-TV market in the United States. 

Former suitor Charter Communications' (NASDAQ:CHTR) offer valued Time Warner at $61 billion. 

When the much larger Comcast trumped the offer with a $69 billion valuation, Time Warner investors rejoiced and most analysts and pundits figured it was a done deal. The thing is, Comcast's offer was composed of stock -- Time Warner Cable would receive the equivalent of 23% of Comcast's shares. At that moment, Time Warner investors were receiving near their requested $160 per share (the valuation came in at $158), but Comcast's stock is down nearly 10% since Feb. 12, At its current price, Comcast's offer is now worth well under $150 per share.

If the stock continues to fall, Time Warner Cable investors and management will likely ask for more stock to compensate for the lower price. What is more interesting, though, is the potential for Charter and its chief backer, Liberty Media Chairman John Malone, to step back into the picture.

When talks between Comcast and Charter broke down, and Comcast spited its smaller competitor with an exclusive deal with Time Warner Cable, Charter and Liberty Media appeared to have been outsmarted. Since then, there is little doubt that Malone has been calculating the companies' next moves. After all, the Father of Cable predicted this industry consolidation to begin with.

Malone may have been able to drum up more support for his company's bid (via its stake in Charter) and could reenter the picture with a superior price. Time Warner Cable management has mentioned that it would prefer not to work with the mercurial Malone, but it wouldn't be a bad move for shareholders. Regardless of personal opinion, Malone is one of the industry's best minds. His plan for a Charter/Liberty/Time Warner Cable mash-up has a very good shot at being a great move for investors in all three businesses.