Comcast and TWC ready to square up against regulators - Lengthy antitrust battle likely; Plan for US$42bn pay-TV and broadband giant

 By Ed Hammond and Emily Steel in New York

Comcast and Time Warner Cable threw down a gauntlet to Washington regulators last Thursday, with a US$42.5bn deal that would create a pay television and broadband giant nearly seven times larger than any rival US cable operator.

The agreed, all-stock offer would bring together the two largest operators in an industry whose traditional video revenues face pressure from rivals ranging from Verizon to Net-flix, but whose growth and pricing power increasingly stems from its grip on America's broadband infrastructure.

The unexpected US$158.82 per share offer from Brian Roberts, Comcast's chief executive, wrongfooted a rival bid from Charter Communications, whose US$132.50 hostile pursuit of TWC had been backed by "cable cowboy" John Malone's Liberty Media.

Mr Roberts, who conducted negotiations from the snowfields of Sochi, where he is overseeing the Comcast-owned NBC network's Winter Olympics coverage, defended the deal as one that would create economies of scale that would spur TV and internet innovation.

However, shares in TWC were trading at about US$145 in lunchtime trading in New York, up 7 per cent on the previous day's close but well below the US$158.82 per share headline price of Comcast's offer, due to expectations that the deal will face a lengthy antitrust battle.

Analysts said the combined company could control about a third of the US pay-TV and broadband markets.

Michael Copps, a former Democratic member of the Federal Communications Commission, said regulators should "promptly and emphatically" reject the proposed deal because it would turn the "already oversized Comcast empire into a colossus". "This is so over the top that it ought to be dead on arrival at the FCC," he said. But Mr Roberts said his company was prepared to divest 3m subscribers to satisfy regulators and expand its share buyback programme to $10bn.

Some large shareholders applauded the deal. Paulson & Co, the hedge fund which owns 6m shares of TWC, branded it a "dream combination".

Comcast shares were off 3.8 per cent at US$53.12, reducing the value of its offer, which represented a 17.37 per cent premium to TWC's closing price on Wednesday. The offer includes no break fee, raising the chance of either side walking away.

Charter's shares fell more than 6 per cent. One person close to Charter said the company felt "duped" by Comcast's behaviour.

Mr Roberts said Comcast-TWC would "not reduce competition in any relevant market" because the two companies did not overlap "in any of the same zip codes".

Consumer advocates called the deal "disastrous". They fear that the company could raise prices and exert undue influence over people's access to media.

Comcast is the largest cable operator in the US with 53m total customer relationships and a US$143bn market capitalisation. TWC has about 15m total customers and a market capitalisation of US$37.6bn.

Moody's, the credit rating agency, said the combined group would have net debt of US$73bn and pro forma 2013 revenue of US$87bn.

Additional reporting by Stephen Foley

(c) 2014 The Financial Times Limited