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Time Warner Cable breakup could allow mergers to sidestep scrutiny

By Alex Sherman, Edmund Lee
 and David McLaughlin
Bloomberg News

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A breakup of Time Warner Cable Inc., which Comcast Corp. and Charter Communications Inc. are said to be considering as part of a joint bid, would let the industry consolidate while potentially sidestepping regulatory hurdles.

Comcast and Charter have discussed the breakup scenario as an alternative to each making rival offers for Time Warner Cable, people familiar with the matter said last week. The move would resemble the joint purchase of Adelphia Communications Corp. by Comcast and Time Warner, which split up the company between them in 2006.

Time Warner Cable, based in New York, employs about 2,000 in its Northeast Ohio / Western Pennsylvania unit that is based in Akron. It is the company’s third-largest division.

On Tuesday, speculation centered around a new possible bidder, too — Cox Communications of Atlanta.

While Comcast has considered a solo deal for Time Warner Cable, that approach would combine the two largest cable companies in the United States and invite stricter scrutiny by the Federal Communications Commission and antitrust regulators. Such a merger would create a dominant company with almost three-quarters of the nation’s cable subscribers.

“A joint deal takes away all the issues of the transaction — including regulatory concerns for Comcast — and it makes it easier for Charter to get some financing since it’s not as large,” said Vijay Jayant, an analyst with ISI Group in New York.

Charter, Comcast and Time Warner Cable declined comment on the speculation.

The talks between Comcast and Charter have been preliminary, and a Time Warner Cable breakup is only one option. Parts of Time Warner Cable would complement each company’s coverage area, increasing the appeal of the transaction.

Comcast, the leader in the industry in subscribers, is strong in places such as San Francisco, Washington and its hometown of Philadelphia. Time Warner Cable — No. 2 to Comcast — serves its headquarters city of New York, along with Los Angeles, Dallas and other markets. Charter ranks fourth, with customers in St. Louis and other cities.

Comcast and Charter will still have to argue to antitrust regulators that they can split up the assets and maintain competition in the industry, said John Briggs, a lawyer at Axinn, Veltrop & Harkrider in Washington.

“The idea would be they wouldn’t really eliminate competition,” Briggs said. “There would be two companies and not have a dominant company. It will get scrutiny. It will not sail through.”

Even so, there are fewer barriers than there used to be to a cable megadeal. In 2009, the U.S. Court of Appeals eliminated an FCC restriction preventing any U.S. cable provider from owning more than 30 percent of the nation’s total subscribers.

Splitting up Time Warner Cable would let Comcast and Charter add users near markets they already serve, making regional advertising more effective, Jayant said. Charter could take Time Warner Cable’s markets in Los Angeles and North Carolina, while Comcast would absorb the New York and Dallas regions, he said. Comcast serves much of the Northeast, though New York is a large gap in its coverage area.

When Comcast and Time Warner Cable acquired and broke up Adelphia in 2006, Time Warner gained 3.3 million customers and Comcast added about 1.7 million. Comcast used the deal to strengthen its presence in Florida, Massachusetts, Pennsylvania and Washington, D.C.

Time Warner Cable bulked up its five major clusters of subscribers in New York, Texas, California, Ohio and the Carolinas. The two companies also traded customers in certain parts of the U.S. to make the deal more palatable.

AT&T Inc.’s failed $39 billion takeover of T-Mobile USA Inc. in 2011 has served as a cautionary tale for would-be suitors in the communications field. That deal, which would have combined the second- and fourth-largest wireless carriers, was opposed by both the FCC and the Justice Department.

If Comcast bought Time Warner Cable outright, it would create a company with 33.3 million cable customers. While the two parties don’t have many overlapping regions, the deal would set up another showdown with the FCC. Tom Wheeler, the FCC’s new chairman, has named consumer-rights advocate Gigi Sohn as special counsel for external affairs — a sign that the commission may oppose deals that threaten competition.

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