Why Charter's $56B deal for Time Warner Cable will (probably) stick

Time Warner Cable finally has a buyer, and it’s the one the nation’s second-largest cable company rejected outright a year ago.

Charter Communications has agreed to buy Time Warner Cable, a larger competitor, for about $56 billion, the two companies announced Tuesday. The proposed merger comes just a month after TWC’s proposed merger with Comcast fell through, as it became clearer that regulators were unlikely to approve the deal. Charter has also struck  $10 billion takeover deal with the much smaller Bright House Communications. 

Charter Communications launched a bid to buy TWC over a year ago in a deal worth $37.8 billion, but Comcast swooped in with a better offer. 

Those two moves would create a formidable foe for Comcast and nearly quadruple Charter’s cable and Internet subscribers. But does this deal stand a chance at approval, when the Federal Communications Commission (FCC) effectively nixed a similar one just a short while ago? Chances are better, for a few key reasons:

(1) It’s smaller

Comcast was already the largest cable and Internet provider in the country when it went after TWC, the second largest. Had that deal gone through, the new company effectively would have controlled about 55 percent of the broadband Internet market in the US, and about 30 percent of the cable subscription market. Advocacy groups and regulators, argued that such a large controlling stake could lead to higher prices and stifled innovation. FCC chairman Tom Wheeler said in April that the deal would pose an “unacceptable risk” to industry competition.

Charter and Time Warner Cable joining forces still represents the idea that opponents of the Comcast merger were against: a tightening of the industry into fewer, larger mega-companies. But Charter currently has just 5.9 million subscribers, and Tuesday’s two proposed deals would give the new company 23 million total customers, still second to Comcast’s 27 million. 

“It does not look to be nearly as big an antitrust concern as the Comcast deal was.

In this instance, you’re combining the No. 2 company with a smaller player that can be a bit of a counterweight to Comcast,” Gene Kimmelman, the chief executive of Public Knowledge, a consumer advocacy group, told the New York Times.

Still, it would be the largest cable industry by value in US history, edging out AT&T's $54 billion purchase of Tele-Communications (TCI) in 1998. 

(2) Charter doesn’t produce content

In addition to its size, a major concern for the Comcast deal was Comcast’s vast stable of media properties. It owns NBCUniversal, regional sports networks including the YES channel in New York, and a stake in the streaming subscription service Hulu. Critics argued that combined with the vast reach of its Internet service, that would give Comcast too much control over what content was distributed over its networks, plus the ability to charge competing content providers like Netflix higher rates to host its content.

Netflix CEO Reed Hastings even called killing the Comcast deal his company’s “top priority” in a quarterly earnings call to investors earlier this year.

(3) The FCC won’t squash cable industry mergers just because they’re cable industry mergers

According to the Wall Street Journal, Wheeler recently called the CEOs of Time Warner Cable and Charter to assure them that the end of the Comcast deal didn’t mean the FCC  would reject all cable deals. But he cautioned in a brief statement Tuesday that approved mergers have to be in he best interests of the public, and that “an absence of harm” to customers is not sufficient grounds to let a deal go forward. That mandate offers some cause for skepticism, since fewer companies dominating an industry (and making it virtually impossible for new competitors to break in), doesn’t generally mean lower prices – see: the airline industry. Investors, however, will benefit greatly: the proposed deal values Time Warner Cable stock at $195 per share, a 14 percent increase over its Friday closing price. On Tuesday afternoon, TWC stock was up 7 percent , hinting that the industry is cheery that this cable marriage will last.