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Pipe dream

11 April 2014 By Jeffrey Goldfarb

Imagine Comcast’s $45 billion plan to buy Time Warner Cable gets the utility treatment. It isn’t a big stretch these days to liken the pipes that bring the internet into homes to those carrying water or electricity. When power companies and the like merge, though, regulators want consumers to share the spoils.

Executives from both cable operators this week tried to persuade legislators on Capitol Hill that their merger would not lead to runaway customer bills but would, in fact, increase internet speeds. That would be an impressive outcome considering the rates Comcast charges subscribers have kept rising even as it has invested less and less relative to revenue. In fact, Comcast envisions slashing Time Warner Cable’s capital expenditures.

The concerns over broadband dominance voiced by lawmakers, rivals and consumer groups are similar to typical worries about utilities with monopoly power. Such fears cratered a series of attempted mergers about a decade ago, including Exelon’s $18 billion bid in 2004 for Public Service Enterprise Group. The Federal Communications Commission is a far cry from the New Jersey Board of Public Utilities, but the parallels are instructive.

After the PSEG takeover faltered over disagreements with the regulator about cushioning customers, Exelon carved up the expected cost savings from its 2011 acquisition of Constellation Energy to the satisfaction of Maryland watchdogs. Rate caps and system enhancements are typical sweeteners. If Comcast were thought of as a utility – an idea that’s even less far-fetched given it just started selling electricity as part of its bundles in Pennsylvania – it could appease regulators and critics in similar ways.

Buying Time Warner Cable is expected to yield $1.5 billion of annual cost savings and Comcast officials have said they “also see strong opportunities for revenue synergies” that are not yet factored into their analysis. Assume these equate to 1.5 percent of the companies’ combined top lines for another $1.3 billion. Together, after tax these synergies would be worth about $20 billion in present value terms.

Allocate $10 billion for the benefit of consumers and assume half that goes to investment, and Comcast could increase last year’s capital expenditure level by 15 percent for five years. That might increase its internet speeds, which lag those in many developed parts of the world. And it would still leave $5 billion to dole out in the form of customer credits or price freezes. Approached that way, the deal might raise fewer hackles.


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