Reviewing the Time Warner-Comcast Deal

 | Feb 18, 2014 | 9:00 AM EST
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You probably heard about the $45 billion megadeal in cable last week. The much-maligned Comcast (CMCSA) presented an all-stock offer of $159 a share to the much-maligned Time Warner Cable (TWC).

Come to think of it, all cable companies are maligned, and for good reason. The service is terrible and they don't innovate. People are dying for a viable alternative.

Let's do a quick review of Time Warner Cable's competitive position. They are hemorrhaging TV customers left and right. The conventional wisdom was that the cord-cutters would be confined to television, but as it turns out, they are leaking broadband customers, too. Much ink has been spilled about the relationship with cable and Netflix. This is a sclerotic business in an industry that is being buffeted by rapid change, including new entrants from players like Apple (AAPL) and Google (GOOG).

This is intended to be a defensive merger. And the main reason for the tie-up is so that a combined CMCSA/TWC, with 30% of TV-watching households, would have unprecedented leverage over the programmers -- who always end up winning in any negotiation. The logical question that you have to ask is, how does the consumer benefit from this, if this merger is going to increase his cable bill?

That would be a serious question to ask of the Justice Department, but the dumb money says that this deal is not going to go through. They point at recent body slams like LCC/AMR and T/T-Mobile.

If you want to talk about precedent, you should be talking about Comcast's purchase of NBC from General Electric (GE), which had more regulatory hair on it than this one. But the deal sailed through. Why? That was because Comcast has a great team of skilled negotiators. And management also is  tight with the Obama administration. How tight? Think golfing buddies.

I try to be cynical, but it is hard to keep up. Actually, a skilled antitrust lawyer could make a pretty strong argument for or against this deal. But on the face of it, it's pretty ridiculous that you'd create a wireline cable monopoly with 30 million customers  in an industry that has a propensity to raise prices on days that end in "y."

I intend to initiate a short position in TWC sometime before the deal closes. I think the deal will close, but I think that the risk/reward if it doesn't close would be very compelling. There is an outside chance that public opposition to the deal would increase to the point that approving it would be politically unpalatable, but I doubt it.

Rather, I think the short is more interesting from a long-term secular perspective -- cable is a donkey technology and it is only a matter of time before someone builds a better mousetrap, whether it's public wifi or Apple TV or whatever it is Google has up its sleeve.

It's a no-growth or negative-growth business at best, and at worst, a buggy whip. TWC just saw its stock nearly double in the last year. And it's a terrible company. I've never seen a better short candidate.

Probably I should be more patient on this -- big secular trades like this take time to play out. I would say that at $159 a share, TWC is more than fully valued. Comcast is paying a fancy price for it. It does not suck to be a Time Warner Cable shareholder right now.



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