When Comcast (CMCSA) announced its intent to purchase Time Warner Cable (TWC), the pay-TV giants offered to divest as many as 3 million subscribers—a concession meant to satisfy federal regulatory concerns about a prospective behemoth that would count as customers nearly one third of all U.S. cable households.
How those 3 million accounts separate from Comcast could be one of the more interesting aspects of the deal. One option under consideration would be for Comcast to spin off that chunk into a new cable operator—one that would instantly become the nation’s fourth largest after Comcast, Cox Communications, and Charter Communications (CHTR). The creation of a new, sizable player in the field would also raise questions about how long that company would remain independent as the cable industry begins what is expected to be a consolidation wave.
In their merger announcement last month, Comcast and Time Warner Cable described their intention to keep the merged company’s subscriber base below 30 percent of the overall pay-TV market. Selling about 3 million subscribers would leave the post-merger Comcast with about 30 million subscribers instead of 33.1 million.
A second option would be to sell off those subscribers; others in the industry such as Charter—which itself sought to acquire Time Warner Cable—would be interested buyers. But spinning off the bloc would probably present a better financial outcome for shareholders of the merging companies. “Far more tax efficient to spin,” BTIG analyst Rich Greenfield wrote in an e-mail. It’s also unclear, he said, “why the government will care if Comcast is 30 million or 33 million subscribers.” Greenfield considers this concession “an unnecessary give” by Comcast.
A Comcast spokesman declined to comment, saying it was premature to discuss how the divestment may play out. Comcast’s chief financial officer, Michael Angelakis, told analysts that the cable companies will examine “tax issues and all those other kinds of elements” as part of any decision on which assets it will divest. “I don’t think this is a short-term thing,” Angelakis said in a conference call announcing the deal. “And we’ll work through that cooperatively, in the best interest of all the shareholders.”
Even if a spinoff were a better option for tax purposes, any new cable company could probably not operate on its own for long, given the industry’s drive to create ever larger companies, says Tuna Amobi, an analyst with S&P Capital IQ (MHFI). “It’s hard to imagine sort of how this [new] company would stay independent for any reasonable amount of time,” he says. The Federal Communications Commission “will have an interest in what I’ll call the substantive outcome, as opposed to the appearance.”