While the country's two largest cable-TV providers are preparing to meet this week with Justice Department officials to discuss the proposed deal, St. Louis-based Charter Communications (CHTR - Get Report) has signaled it's all but certain to make an offer for Time Warner Cable if the Department of Justice and the Federal Communications Commission reject the merger, or demand concessions that the would-be partners deem excessive.
Since plans for a merger were announced 14 months ago, Time Warner's operations have steadily improved. In the fourth quarter, the company reported that revenue for its Internet business, its fastest-growing division, jumped 7.4% to $1.64 billion. As fewer customers opt for cable TV, growth will come from increased broadband usage, especially since the FCC said it wouldn't get involved in setting rates.
On Monday shares of New York-based Time Warner had climbed 1% to $151.14 while Comcast was ladding 0.2% to $58.51.
If the deal is stuck down, Time Warner will still be in a favorable negotiating position with Charter, which has a comparatively small market share and "much greater need for a scale-building transaction," according to Buckingham Research media analyst James Ratcliffe.
"Charter seems to want to be a consolidator and gain more scale," said David Heger, an analyst with Edward Jones. Especially under the leadership of activist investor John Malone, Charter has adopted a strategy of growing through acquisitions, most recently with the $10 billion purchase of Bright House Networks.
"They'll be interested in at least some of the assets if not the whole thing," Heger said. "It gives Charter access to some of the former Time Warner subscribers, but it's all hinging on if the Comcast deal goes through."
Regulators' attention is largely focused on broadband deployment rather than cable TV. The overriding concern is that a combined company would wield too much control (roughly 57%) of the U.S. broadband network, including much of the New York City and Los Angeles market, and would have little reason to accelerate the development of higher-speed broadband services into more homes and businesses.
As FCC Commissioner Tom Wheeler said in the debates leading up to the commission's February approval of net neutrality rules, oversight of the Internet should ensure that newer Net offerings have reasonable opportunities to compete with market leaders, who in turn should be incentivized to improve broadband networks.
"Regulators fear that the cable companies will take advantage of their position in the cable market to narrow consumer choice in the Internet market," Herbert Hovenkamp, a University of Iowa law professor who specializes in antitrust issues, said in a phone interview from Iowa City. "The cable companies have not been real promoters of a fast Internet, and for a good reason: The better Internet service people get, the more they get weaned away from traditional cable, which has been very profitable."
One possible concession that the FCC and Justice Department could extract from Comcast is that it won't be allowed to take full ownership of Hulu, the popular online-streaming service that it shares with 21st Century Fox (FOXA) and Disney (DIS), according to Hovencamp. Comcast has previously expressed interest in buying all of Hulu to compete more aggressively with Netflix (NFLX) and Time Warner's (TWX) HBO NOW.
But by owning more than half of the country's broadband connections, regulators may fear that Comcast will be able to feature its channel packages above those of competing services, whether they be Netflix or Dish Network's (DISH) recently introduced Sling TV, or HBO NOW.
"It's a contest between old and new technologies, and there's no question where the market is going," Hovenkamp said. "The question is whether it's going to get there quickly, or whether the cable companies are going to be able to hold it up."
Also, in the event of a blocked deal, Time Warner Cable will have a roughly $4 billion capacity to boost its stock through share buybacks, according to a Buckingham report. This is because Time Warner Cable's debt-to-earnings ratio is sufficiently low after having suspended share buybacks when the Comcast acquisition was first announced.
Buckingham predicts Time Warner Cable stock could rise as high as $219, a 46% gain from opening levels Monday, and could plunge merely 7% in a worst-case scenario deal break, according to the report.
"They haven't been buying back shares since the deal was announced, and they are definitely building up some capacity," Heger said. "The business has continued to grow while we're waiting for the deal to happen, and multiples in the industry have come up."
If Time Warner and Comcast are unable to satisfy regulatory concerns in upcoming negotiations, the proposal will most likely be taken to a hearing, which "basically is a formality that the deal isn't going to go through," Heger said. "I wouldn't write off Comcast yet though. They were successful in the NBC Universal deal, and that took some concessions. It's looking more doubtful than before, but Comcast is pretty good at negotiating in D.C."
The FCC and Justice Department approved Comcast's $13.8 billion bid for control of NBC Universal in January 2011, more than two years after Comcast announced its intent in 2008.
The Department of Justice declined to comment.