Why Comcast Can't Use Its Best Argument for Time Warner Cable Deal

NEW YORK (TheStreet) - When Comcast (CMCSA) makes its case before the Senate Judiciary Committee for why it should be able to buy Time Warner Cable (TWC), the company will be forced to do so with one hand tied behind its back.

One of the best arguments from the public's perspective is how conservatively the deal is structured. But investors hate this aspect of the merger, which is likely one reason Comcast shares have fallen sharply since its Time Warner Cable offer was announced.

Because Comcast proposed to buy Time Warner Cable using no debt whatsoever, the cable giant is unlikely to run into financial trouble and be forced to jack up prices while cutting back service and/or much-needed upgrades to the nation's broadband infrastructure. Those obvious benefits, however, are of little interest to investors who appear disappointed by the debt-free transaction.

Comcast shares have fallen 12% since the deal was announced, and many wonder why so much Comcast stock is being used when the cost of debt financing is so cheap. Comcast will pay Time Warner Cable shareholders 2.875 shares of newly issued Comcast common stock for each of their shares.

"If there is a knock against the transaction from the people we have spoken to it is that while the leverage goes up a little, it doesn't go up as much as some would like," Craig Moffett, a long-time cable analyst, said in a March conference call. "Anything that would raise the leverage of a transaction would probably be welcomed by investors, even if it meant a slightly higher headline price," Moffett added.

Those comments speak to a second issue. Washington and the media have generally treated Comcast's offer for Time Warner Cable in a vacuum. But Comcast, if anything, is more of a white knight for Time Warner Cable. 

CEO Rob Marcus reached out directly to Comcast's Brian Roberts after Time Warner Cable rejected a heavily debt financed takeover offered by Charter Communications (CHTR), a cable operator that emerged from bankruptcy only a few years earlier.

Time Warner Cable characterized that transaction as speculative, with hard-to-understand synergies like nearly $8 billion in net operating loss carry forwards. Add over $20 billion in debt financing for the transaction and it's no surprise Marcus dialed up his biggest competitor, Comcast.

Faced with the alternative of Charter's offer, TheStreet called Comcast's deal "good for America." Comcast and Time Warner Cable's combined debt to earnings before interest, taxes, depreciation and amortization (EBITDA) is forecast to be less than half the offer Charter proposed. Hedge fund investor John Paulson, an active player in the consolidation of the wireless industry, first told TheStreet that Comcast's offer was "a dream combination" for Time Warner Cable shareholders.

Comcast, likely out of fear of more short-term oriented investors, will continue to downplay the merger's conservative capital structure. That may indicate Comcast believes it can successfully make its case in Washington without upsetting Wall Street.

One wonders whether, in the most aggressive merger effort since AT&T's failed takeover of T-Mobile, Comcast has its argument backwards.

-- Written by Antoine Gara in New York

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