By Shalini Ramachandran, Joe Flint and Brent Kendall
The Federal Communications Commission's staff threw up a
significant roadblock to Comcast Corp.'s proposed acquisition of
Time Warner Cable Inc., recommending a procedural move that could
potentially sink one of the media industry's biggest mergers in
years.
The FCC staff reached a conclusion that the best option for the
FCC is to issue a "hearing designation order." In effect, that
would put the $45.2 billion merger in the hands of an
administrative law judge, and would be seen as a strong sign the
FCC doesn't believe the deal is in the public interest, according
to people familiar with the matter.
Comcast and Time Warner Cable may still have an opportunity to
weigh in on the matter before the proceeding moves forward, one of
the people said.
A hearing could be a drawn-out process, and some regulatory
experts describe the procedure as a deal-killer, though Comcast
would be entitled to make its case for the tie up.
Comcast executives on Wednesday met with officials at the FCC
and the Justice Department, as those regulators' reviews of the
proposed merger enters its final stages.
A Comcast spokeswoman declined to comment. In a written
statement, the company confirmed it met with FCC and Justice
officials but said, "we do not believe it is appropriate to share
the content of those meetings publicly."
Regulatory scrutiny of the deal has intensified in recent weeks.
The government is concerned about the influence the combined cable
behemoth would have in the broadband and pay-television markets.
The deal would create a company with control over roughly 30% of
the pay-TV market and 57% of the market for broadband Internet
service, which the FCC now defines as speeds 25 megabits-per-second
and higher.
The Justice Department meeting with Comcast on Wednesday was a
chance for both sides to air their views and begin discussing
whether there are any concessions the cable companies could offer
that would ease the regulators' worries.
Justice officials are said to be wary of attempting to address
the agency's concerns through "behavioral remedies," or pledges by
Comcast that it will conduct business in a certain way.
But there might not be a lot of scope for more "structural"
conditions on the deal. Comcast and Time Warner Cable already have
deals with Charter Communications Inc. to sell or spin off systems
serving 3.9 million customers if the merger goes through.
The use of hearing designation orders is rare, but the procedure
doesn't bode well for mergers. In 2011 AT&T Inc. and T-Mobile
USA dropped a planned $39 billion merger after the Justice
Department filed an antitrust lawsuit to block the deal and the FCC
issued a hearing designation order on the deal.
If the deal were derailed, it would be a major win for media
companies that lobbied aggressively to kill it, including Discovery
Communications Inc., which was very vocal in its stance that a
Comcast-Time Warner Cable combination would be bad for content
companies. Other programmers including Time Warner Inc., Walt
Disney Co. and 21st Century Fox Inc. have privately raised concerns
about the deal to regulators.
"The fundamental problem with this transaction is there is no
major constituency outside of Comcast and Time Warner Cable that
want it to move forward," said Rich Greenfield, analyst at BTIG
Research, which has been predicting the deal falls apart.
Mr. Greenfield noted that it would be a "very uphill battle" for
Comcast to prove its case through the FCC's hearing process that
its merger is in the public interest. "Is it really worth spending
more time and resources to fight the government?"
For Comcast, the proposed Time Warner Cable deal is a way to
seek out growth and synergies in a maturing U.S. cable sector. The
pay-tv business is stagnating as consumers begin to "cut the cord,"
and the future depends largely on the high-margin broadband
Internet business.
If it were blocked from pursuing a major deal in the U.S.,
Comcast could follow the path of other big cable and media
companies like Fox, Discovery and John Malone's Liberty Global, by
looking for acquisitions in faster-growing overseas markets.
Comcast also would be in a strong position, as the nation's
largest broadband operator, to offer a streaming video service,
capitalizing on growing demand from consumers for services like
Netflix. Launching such a service in the midst of the merger review
would be challenging. Comcast also has made investments in the
fast-growing digital-ad technology business.
Time Warner Cable, meanwhile, could move back into play if a
deal with Comcast doesn't pan out. Before Comcast snapped up the
company, it was pursued by Charter Communications Inc., which is
backed by Mr. Malone's Liberty Broadband Corp.
Asked at an investor day last year whether Charter would look to
buy TWC if its Comcast deal fell apart, Mr. Malone said
emphatically, "yes!" Charter has big ambitions--last month, it
acquired Bright House Networks LLC, a cable operator with two
million customers, for $10.4 billion in cash and stock.
Time Warner Cable is already preparing "Plan B" communications
strategies for if the merger falls apart, people familiar with the
company's thinking said.
The recommendation from the staff for a hearing order is the
first step in a regulatory process. It must be circulated to all
commissioners who would then vote on whether to approve it.
Comcast and Time Warner Cable can continue to lobby the FCC in
the weeks ahead to attempt to make a case why the staff's view is
incorrect.
Separately, the other major media merger being reviewed by the
FCC--AT&T's proposed purchase of satellite broadcaster
DirecTV--is on much more solid ground with the FCC's staff, a
person familiar with the matter said. That combination is seen as
more healthy for competition than a Comcast-Time Warner Cable
pairing, the person said.
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com
and Joe Flint at joe.flint@wsj.com
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