NEW YORK (The Deal) -- The possibility that Comcast (CMCSA - Get Report)would enter a bidding war with Charter Communications  (CHTR - Get Report) for Time Warner Cable (TWC) is festooned with red flags warning of the regulatory hurdles Comcast would face in Washington.

Approvals by the Department of Justice and the Federal Communications Commission are by no means a given. If the necessary government sign-offs were to be obtained, they would almost certainly come with a lengthy list of conditions aimed at preventing Comcast from abusing the market power it has by being both the largest cable system operator and a major provider of television content to harm rival TV and online content producers.

The conditions would be similar to the ones Comcast agreed to in order to win DOJ and FCC approval for NBC Universal in 2011.

"We believe government approval would be possible, but it would be costly, with serious risk. This would be a brawl," wrote Stifel, Nicolaus analysts Christopher King and David Kaut in a note to clients.

Although an acquisition would present Comcast with "significant" synergies through cuts in programming costs, corporate overhead and increased scale for equipment purchases, the analysts questioned whether the deal would be worth it, given the possibility of protracted federal review, inevitable government regulatory conditions and Time Warner's high valuation.

The companies are likely to argue that their would-be deal presents the same issues as those resolved by regulators in the Comcast-NBCU combination through numerous conditions. The vertical integration of distribution and content was the primary issue then and would be extended throughout Time Warner markets.

The FCC would be in no position to prohibit the merger simply on the expanded reach of the combined Comcast and Time Warner cable system. The two companies have no geographic overlaps and the D.C. Circuit Court of Appeals has twice thrown out the FCC cap limiting cable horizontal ownership to 30% of the nationwide pay-TV market. Comcast-Time Warner would have only about 33% of the market and also would not have as many total subscribers as AT&T (T - Get Report) or Verizon (VZ - Get Report).

Nevertheless, the deal likely would face intense opposition from activist groups opposed to media consolidation and from many Democrats on Capitol Hill. "Cable critics and possibly rivals who would argue it's simply a 'bridge (deal) too far' or 'unthinkable,'" to merge the two largest cable systems, wrote the Stifel, Nicolaus analysts.

Aside from the reservations about sheer size of the cable operations, the DOJ and FCC would more likely raise concerns about the possible harm to competition from increasing both cable system concentration and vertical integration.

"We suspect the government would raise objections about the potential for Comcast-TWC bullying of competitors and suppliers, given the extent and linkages of their cable/broadband distribution, programming control, and broadcast ownership," the analysts wrote. They predicted the agencies would demand that the Comcast-NBCU merger conditions cover Time Warner and be extended in duration several years beyond their current 2018 expiration.

Some of the conditions of the NBCU deal would likely be strengthened, Kaut added in an interview with The Daily Deal.

Several of the conditions of the 2011 agreement have been criticized for not working well or being unclear. The FCC continues to grapple with complaints from Bloomberg LP over a behavioral condition that Bloomberg said entitles its news channel to be carried adjacent to CNBC and other news channels whenever Comcast uses a "news neighborhood" on its program guide. There have also been disagreements over implementing a condition requiring NBCU to make its content available to competing online video distributors - such as Netflix (NFLX - Get Report) - that receive comparable programming from one of NBCU's peers.

The biggest problems with the NBCU conditions are their complexity, the number of conditions and the wiggle room in how they are worded," Kaut said.

Paul Gallant, an analyst with Guggenheim Securities was somewhat more optimistic that the deal would clear both agencies. But he also predicted it would be saddled with heavy conditions.

"A deal like this will be hard for some Democrats to get comfortable with because media consolidation tends to strike a unique chord," he told The Daily Deal. "But in the end I suspect the FCC will decide that applying pro-competition merger conditions is better than rejecting the deal out right."

Among the specific conditions he envisioned the regulators considering:

Giving Netflix and other Internet content distributors the same rights as traditional cable and satellite programmers to purchase NBCU content.

  • Enforcing the FCC's current net neutrality rules that prohibit disparate treatment of competitors' content regardless of how a pending court case against the rules turns out.
  • Ensuring pay TV competitors' previous access to NBCU content by reimposing program access rules on Comcast.
  • Establishing a new complaint process for competing distributors to object to pricing demands NBCU channel bundles and for caching of Internet delivered content.
  • Insisting on a buildout commitment for delivering broadband to schools and for selling spectrum controlled by NBC and Telemundo stations in large cities.

The regulators might take a less burdensome approach if Time Warner is split up between Comcast and Charter Communications, which is also considering make a bid, Gallant said.

Written by Bill McConnell