Comcast Seen Facing Painful Choices in Bid for Merger Approval

Comcast Corp. must make painful choices about shedding assets to both satisfy U.S. officials who are resisting its bid to buy Time Warner Cable Inc. and to preserve the deal’s value, industry analysts and lawyers said.

The biggest U.S. cable company could offer to sell subscribers in major markets such as New York and Los Angeles to appease regulators, according to lawyers and analysts. Another option is selling its one-third stake in Internet video service Hulu, which has growth potential as consumers increasingly watch television online.

Comcast representatives sought to gauge the extent of the Justice Department’s objections at a meeting Wednesday afternoon. The company is trying to head off a possible lawsuit by the government, which is investigating whether the enlarged company would wield too much control over national broadband Internet service. The company also met with officials of the Federal Communications Commission.

Concerns that the biggest U.S. cable company could stifle competition from online video services may not be resolved by selling subscriber accounts, divesting businesses or vowing to offer faster Internet, analysts said.

“It’s becoming clear that the FCC and perhaps DOJ want to reject this deal,” said Craig Moffett, an analyst at MoffettNathanson. “The issue now is whether they legally can. If they decide they have a strong enough case, I’m not sure there are any remedies out there that will fix it.”

Going into Wednesday’s meetings, antitrust and FCC officials hadn’t started negotiating with Comcast about conditions to the merger that would resolve concerns, people familiar with the matter have said.

Consumer Choice

Spokesmen for the Justice Department and the FCC declined to comment on Wednesday’s meetings as did Comcast and Time Warner Cable.

Lawyers at Justice Department’s antitrust division were leaning against the deal and preparing arguments that could be used in a lawsuit to block it, Bloomberg News reported on April 17, citing people familiar with the situation.

Comcast argues the deal will lead to improved services for customers and says the merger won’t reduce choices for consumers because the two companies don’t have overlapping subscribers.

While Comcast has said there is no basis to block the deal, fighting the Justice Department in court could significantly delay the merger and test Comcast’s patience, said Amy Yong, a media analyst at Macquarie Capital USA Inc.

“The bigger question is: would Comcast want to slug it out with regulators for two or three years to get this deal done,” Yong said.

Legal Challenge

The department challenged 15 deals in the year ending Sept. 30, 2013, most of which settled or were abandoned after being disputed, according to Bloomberg Intelligence. While seven of these cases resulted in complaints filed in federal court, only two were fully litigated. The department prevailed in both.

One of regulators’ biggest concerns -- whether the company would have too much power over online video -- doesn’t go away if Comcast gives up more subscribers, according to Moffett. If regulators decide Comcast could use its expanded broadband footprint to impede online video services, it wouldn’t matter whether Comcast has 30 million subscribers or 24 million, he said.

The Justice Department prefers remedies in which businesses and assets are sold to preserve competition, said Jennifer Rie, a litigation analyst for Bloomberg Intelligence in New York. Conditions which impose behavioral requirements on companies are difficult to police and are disfavored, Rie said.

Keeping Promises

Complaints that Comcast didn’t live up to promises made when it acquired NBCUniversal in 2011 may make regulators reluctant to agree to additional behavioral fixes, according to Rie.

“DOJ may be thinking, why is it going to work this time if it didn’t work the first time,” she said. “People are saying Comcast can’t be trusted.”

A combination with No. 2 Time Warner Cable, based in New York, would leave Comcast with about 29 million residential video customers, about 29 percent of the home pay-TV market, following divestitures unveiled after the merger was announced last year. Comcast would also have most of U.S. Internet subscribers with fixed broadband capable of the 25 megabits-per-second speed standard that the FCC adopted in January.

Selling Customers

“The challenge is when you put these two companies together what the government is looking at is that broadband share,” said Rich Greenfield, an analyst at BTIG in New York. “The reality is there is no competition. For the vast majority of consumers, there is no choice for broadband.”

If Comcast shed more subscribers to appease regulators, those subscribers could be attractive to Cox Communications Inc., the industry’s No. 3 provider. Cox has customers near Time Warner Cable’s footprint in Los Angeles and Comcast’s footprint in the Washington area.

“If there are opportunities to acquire subscribers that make sense for our business we will take a look,” Cox spokesman Todd Smith said in a statement.

Charter Communications Inc., the No. 4 in the industry, has already agreed to take control of 3.9 million Comcast cable-TV customers to ease approval for the Comcast-Time Warner Cable merger. A Charter spokesman declined to comment on whether the company would be interested in acquiring more Comcast subscribers.

Pivotal Research Group analyst Jeff Wlodarczak says Comcast can offer numerous concessions besides shedding more subscribers.

Faster Speeds

Comcast could agree to offer faster Internet as part of its low-income broadband program, agree not to sue the FCC over open Internet rules, or introduce ultra-fast 1 gigabit-per-second broadband speeds across its footprint within a year of the deal closing, he said.

Comcast could give up entire markets like Chicago, Detroit and parts of Florida in exchange for gaining Time Warner Cable markets in Los Angeles and New York, said Maurice Stucke, a former lawyer with the Justice Department’s antitrust division who is now at the Konkurrenz Group. He said that’s probably the only scenario that would appease the government.

“If Comcast already has significant power, how much bigger is DOJ willing to let Comcast be?” said Stucke, who represented a consumer group opposed to the merger. “DOJ may be saying, ’You’ve already gone beyond that point and we’re not going to allow you to get any bigger.’”

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