You can't blame Comcast (NASDAQ: CMCSA) for feeling a little skittish about its approval chances with Time Warner Cable (NYSE: TWC) these days. What was once considered a slam-dunk proposition in the eyes of analysts and followers, has now taken a more unpredictable turn. It appears Comcast wasn't prepared for the subsequent fallout and now faces a noticeably more difficult path to approval. Ironically, the merger may be denied due to broadband Internet market power rather than pay-TV concerns.
For those not following the industry, the Federal Communications Commission gained increased Internet regulatory powers in wake of the Title II designation. After drafting rather toothless regulation in 2010, Verizon made what's now considered a huge strategic error by getting those laws overturned in a lawsuit, forcing the FCC's hand on the matter. Still, the designation was shocking to many observers and hinted to a more consumer-focused FCC, a departure from the FCC of yesteryear that's been defined by a revolving door of industry executives.
So, in the event the FCC denies the merger, what's Comcast to do? BTIG Research's Richard Greenfield had a few intriguing ideas. Most notably, he opined about a potential acquisition of Netflix (NASDAQ: NFLX).
Would Netflix cost more?
Specifically, Mr. Greenfield wrote (by way of Fierce Cable), "Netflix could provide Comcast with an incredible team and platform to learn from, which could accelerate Comcast's virtual MVPD efforts. Not to mention, Comcast could further the reach of Netflix domestically by integrating the service into its set-top boxes."
On the surface, it appears the transaction would cost Comcast more as it would probably be met with intense pushback from Netflix's shareholders. Right now, Netflix is valued at $26.5 billion, and a large takeover premium would certainly be required. For example, Comcast agreed to pay a 57% premium for Time Warner Cable, valuing the enterprise at 8.3 times trailing-12-month EBITDA in an all-stock deal.
Here's the rub, the market has already assigned Netflix an EV/EBITDA multiple of 57.55 times with no takeover premium attached. And because of Netflix's high growth, it would be hard to only offer a 57% premium if that's what Time Warner Cable investors wanted.
Interestingly, Netflix has a market capitalization close to Time Warner Cable's pre-announcement market cap -- $26.5 billion versus $28 billion, respectively. It's safe to assume Netflix would cost more than Time Warner Cable, and many high-growth accustomed Netflix shareholders would probably opt for cash over shares in a low-growth pay-TV provider, forcing Comcast into the debt markets.
Could Netflix still keep its disruptor status if owned by the biggest cable company?
Perhaps the biggest question for Mr. Greenfield is whether Netflix would be able to keep its status of industry disruptor in the event Comcast owned the company. This is a multifaceted question: On optics, perhaps Netflix is still able to keep its cool status -- Budweiser is still able to market itself as the quintessential American brand, although it is owned by Belgian and Brazilian beer maker InBev, now A-B InBev -- but technology isn't quite a can of suds, is it?
More importantly, however, is how aligned to its current value proposition of pay-TV disruption could Netflix be if its success would impair its owner? More recently, we've seen both networks and pay-TV operators providing streaming offerings. In each case, it seems as if they don't want to offer a great alternative for fear they'll kill the golden goose: big, expensive pay-TV offerings. In the end, I think the risk is to the downside with very few positive synergies, and Comcast won't make a serious offer.
Foolish Final Thoughts
Mr. Greenfield does mention an interesting proposition, to increase Netflix's reach by cable box integration. However, Comcast doesn't need Netflix in order to build out a library of streaming content like movies available on its set-top boxes; it can do this and monetize this service on its own -- and probably for less than it would cost to buy Netflix. To be fair, it would take time and money to build out a content library -- too bad Comcast doesn't own one-third interest in Hulu Plus... oh, wait, it does.