On Wednesday, lawmakers on Capitol Hill will ask Comcast to defend its proposed takeover of Time Warner Cable, a deal that would merge the two largest cable operators in the country. The Senate Judiciary Committee is expected to ask Comcast executives tough questions about competition and scrutinize how much choice consumers have when it comes to high-speed Internet.
But lawmakers are not the only ones taking a second look at the deal. Time Warner Cable investors are closely watching Comcast’s share price â€" which has been sliding â€" knowing that its movement affects the value of the all-stock deal.
Since Comcast announced its surprise deal for Time Warner Cable two months ago, its shares have fallen about 10 percent. For investors being offered 2.875 shares of Comcast stock for each of their Time Warner Cable shares, that means they are receiving about $140 a share instead of nearly $159 at the time the deal was announced.
To some, this might seem like an opening for Charter Communications, the smaller regional cable operator that had been pursuing Time Warner Cable, to re-enter the fray.
Charter has still not withdrawn the slate of directors it nominated to Time Warner Cable’s board. And with Time Warner Cable shares trading around $136, it seems as if Charter wasn’t too far off with its most recent bid, which had a value of $132.50 at the time it was made.
But Charter shares have fallen, too, sliding about 14 percent since it was outmaneuvered by Comcast. Its most recent bid, consisting of $82.54 in cash and 0.372 of a Charter share for each Time Warner Cable share, is worth about $126.30. That is down from the value of $132.50 a share when it was proposed and still more than $14 below the current value of the Comcast bid, leaving Charter with a big hole to plug.
The performance of Time Warner Cable shares is telling, too. They are trading well below the original value of the Comcast bid of nearly $159. But that is only about 4 percent below the current value of the Comcast bid of $140 a share, a typical arbitrage spread that suggests short-term investors think the deal will get done.
What is more, had Time Warner Cable accepted an offer from Charter instead of Comcast, its stock might be trading at a discount of even more than 4 percent because of the large cash component of the deal and investor unease about the large debt load Charter was preparing to take on.
Comcast is not taking anything for granted, though. The company said that it would increase its share repurchase program if investors accept the deal, sweetening the pot.
It’s worth noting that when Time Warner Cable finally did agree to sell, it did so without a so-called collar as part of the deal structure. Collars stipulate that, in the event of a steep decline in the acquirer’s share price, the investors in the target company will receive more shares. When Time Warner Cable made a counteroffer to Charter, it included a collar. But when it sold to Comcast, the deal did not have one, meaning that Time Warner Cable shareholders are at the mercy of Comcast’s stock price.
Comcast still has something to prove on Capitol Hill. And winning over regulators could prove harder than expected. But for now, Wall Street seems sold on the deal.
