International Forecaster Weekly

Internet Regulations Spook Investors in Cable Deal

In 2010 the FCC released its Open Internet Order as a response to public fears about the possibility of ISPs abandoning net neutrality. It was an ambitious order that included strict regulations against blocking or slowing down websites arbitrarily.

James Corbett | November 12, 2014

So how does the name Comcast Time Warner Cable Inc. sound? Or maybe it should be Time Comcast Warner Cable Inc. How about Comcast Time Cable Inc. Warner?  Whatever it ends up being called, Comcast is looking to acquire Time Warner Cable for $45 billion, which, along with Time Warner Cable's $22 billion debt would value the deal at just over $67 billion, making it the 16th largest corporate merger in history.

It would also merge America's first and second largest internet and cable companies, which together service two out of every three homes in the country.

            As is to be expected, a merger of this size is drawing its share of criticism and ire. But the criticism is not just coming from disgruntled customers and a public that is justifiably wary about the monopolization of cable and internet services; the deal is drawing comment from what is commonly referred to as the “highest office in the land.” No, not the Goldman Sachs boardroom (although that would be more apt for the title), but the White House. In a statement this week, lame duck President Obama urged the FCC to include broadband providers in the same category of regulation as public utilities.

            “President Obama’s plan would reclassify consumer broadband services under what’s known as Title II of the Telecommunications Act,” a post on earlier this week explained. “It would serve as a 'basic acknowledgement of the services ISPs provide to American homes and businesses, and the straightforward obligations necessary to ensure the network works for everyone - not just one or two companies.'” The White House blogpost, entitled “President Obama Urges FCC to Implement Stronger Net Neutrality Rules” goes on to explain that the plan would ensure what is known as “net neutrality” by prohibiting internet service providers from blocking customers from accessing legal websites or intentionally slowing down or speeding up access to selected sites. It would also enforce greater transparency in the technical operations of providers to ensure that they aren't interfering with traffic at a network level.

            As the post goes on to note, “the FCC is an independent agency and the decision is theirs alone,” meaning that the President's proposed rules are simply recommendations and don't have to be followed. But even the mention of the specter of increased net neutrality regulation has left some investors spooked about the potential for price regulation cutting into profits for the proposed merged entity (Time Inc. Cable Warner Comcast?). Upon news of the statement, Cablevision System Corp. stock dropped 1.69% and Charter Communications Inc. fell 6.24%.

            But do investors really need to worry? In 2010 the Federal Communications Commission released its “Open Internet Order” as a response to public fears about the possibility of ISPs abandoning net neutrality. It was an ambitious order that included rules for greater transparency from ISPs and included strict regulations against blocking or slowing down websites arbitrarily. Of course it was appealed in court by Verizon, and in January of this year a federal appeals court issued a ruling effectively de-clawing the order. Under the appeals court ruling ISPs would be able to block or slow down other services, but they would have to tell their subscribers they were doing so. As things stand now, and unless the FCC does treat ISPs as “common carriers” or public utilities, there is no legal basis for it applying Obama's proposed net neutrality plan.

            Regardless of the likelihood of actual net neutrality regulation, or whether that would even extend to the FCC actually regulating prices, investors are still wary about the deal. Comcast has already agreed to divest 3.9 million subscribers to appease regulators, but the fear that regulatory approval might require too many concessions is causing anxiety in the market. The news also comes on the heels of a string of failed merger bids that have left hedge fund managers betting on the deals in the red, including AbbVie's failed $54 billion takeover of Shire PLC and Sprint's abandoned bid to acquire T-Mobile US. The bitter taste in the mouth of investors in these deals may be enough to keep some hedge funds on the sidelines of this latest deal.

            Given that many of Time Warner Cable's largest shareholders are hedge funds specializing in mergers (Paulson & Co., D.E. Shaw & Co., Pentwater Capital Management LP) there is a significant amount of financial firepower looking to cash in on a merger. But given the significant regulatory hurdles and potential public backlash over the deal, as well as the pronouncements of the President himself seeming to weigh the deal down, don't look for the merger to proceed in the near future.

            Inc. Cable Warner Comcast Time? Don't worry, they'll have plenty of time to work on the name.