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Comcast bows to inevitable—walks from Time Warner Cable deal

Anticipating the worst, Comcast abandoned its deal to buy Time Warner Cable in one of the largest media mergers ever attempted.

The $45 billion deal had been dragging on for 14 months, but came to a head earlier this week when Comcast met with Department of Justice and the Federal Communications Commission.

Both agencies were leaning against the deal. While the DOJ would have had to block the merger in court on competitive grounds, the FCC, which reviews the deal for its public interest benefits, had much broader latitude and could have dragged on the deal for months.

Comcast delivered the news Friday morning in a very terse, four paragraph release.

“Today we move on. Of course we would have liked to bring our great products to new cities, but we structured this deal so that if the government didn’t agree, we could walk away,” said Brian Roberts, chairman and CEO of Comcast.

The collapse of the deal is a big setback for Comcast and closes the door in the short term to any thoughts of getting bigger in terms of acquiring another big cable operations or broadband provider, at least during this Administration.

The cable giant, which has close ties to the Administration, tried to replicate its successful NBCU acquisition strategy with promises to extend its compliance with the FCC’s 2010 net neutrality rues and expand its Internet Essentials low-cost Internet service to bridge the digital divide.

The company hired a large army of lobbyists, spent $21.4 million over the last five quarters on lobbying expenditures, and ran a multi-million “together is better advertising” campaign that ran almost daily in the D.C. press.

What likely motivated Comcast to kill the deal was the FCC’s threat to designate the merger for an administrative hearing, a move that is considered the kiss of death. The FCC has used the administrative hearing maneuver before to kill a deal it didn’t like: in 2011 for the $39 billion AT&T/T-Mobile merger and in 2002 for the proposed merger between Echostar and DirecTV.

The deal would have combined the No. 1 and the No. 2 cable operators, but throughout the regulatory process, it was all about broadband. The fact that Comcast was already the largest video provider, one of the nation’s largest home phone providers, owned a movie studio, a broadcast network, and many cable and regional sports channels, was all secondary.

Although Comcast could spin-off video subscribers, there was little the company could do to shave its whopping 50+ share in high speed broadband post merger.

While Comcast kept arguing that the transaction would not impact the competitive situation in the local markets it was acquiring, regulators instead focused on the national market, as they did in the AT&T/T-Mobile merger.

“The ironic part of the cable broadband monopoly at 25Mbps is that they invested the capital to enable those speeds, while other industries failed to do so,” wrote Richard Greenfield of BTIG Research in a February 2015 report. “Essentially, cable built their way into a monopoly and are now being punished for it.”

Early in the process, Comcast-Time Warner Cable seemed almost like a sure thing. But a strong public outcry, coupled with devastating press reports about poor customer service, helped sour DC’s opinion of the merger. Public interest groups marshaled more than one million consumers who signed petitions urging regulators to kill the deal—the same tactic that help kill the AT&T/T-Mobile merger.

“Time was the enemy of the deal; various things happened that caused the political establishment to side with the little guys and say there was too much aggregation of power in one place,” Dick Parsons, former chairman and CEO of Time Warner, now with Providence Equity Partners said on CNBC. “If it was just cable, it would have been a done deal, but it’s broadband.”

Comcast and Time Warner Cable aren’t the only losers. Charter Communications was slated to acquire 3.9 million subscribers from Comcast, which engineered the sale to keep the merged company’s national cable penetration at or below 30 percent in an attempt to sweeten the deal for regulators.  In a complex swap, Charter would keep 1.4 million of these subscribers;  the other 2.5 million subscribers were to be spun off into a new cable company that would be two-thirds owned by Comcast-Time Warner Cable shareholders and one-third owned by Charter. As a result of all these deals, Charter  was poised to become the second largest cable operator after the combined Comcast/TWC entity

And, in a final complication, Charter last month agreed to buy Bright House Networks, the sixth largest cable operator, for $10.4 billion. That transaction was contingent on a successful Comcast/TWC merger and spin of cable subscribers.

If there is any consolation for Comcast, it is that it doesn’t have to pay a deal break-up fee to Time Warner Cable.