NEW YORK (The Deal) -- Executives from Comcast (CMCSA - Get Report) and Time Warner Cable (TWC) are scheduled to sit down with officials from the Department of Justice and the Federal Communications Commission to discuss possible remedies aimed at addressing the regulators' concerns about the planned $67 billion merger of the country's two largest cable operators.
Expected to be on the table are concessions the companies could make to address competitive harms the regulators believe would be created by giving one combined company enormous national market share in the provision of broadband service, as well as leverage over programmers that seek carriage over cable systems, and a possible gatekeeper role over companies such as Netflix (NFLX - Get Report) and Amazon (AMZN - Get Report) that need interconnection to the cable carriers' high-speed backbone.
Must Read: Warren Buffett's Top 10 Dividend Stocks
Consumer and public-advocacy groups are calling on the FCC and the DOJ to block the acquisition, because it would marry Comcast, the country's largest cable TV and broadband provider, with the second-largest player, handing the merged company tremendous market power.
Netflix and Dish Network (DISH - Get Report) have opposed the deal, as have consumer groups. They have pushed for blocking the deal or, if regulators' say it should move ahead, price controls on backbone interconnection, the ability of third parties to participate in advertising interconnects and non-discrimination rules that will ensure that so-called "over-the-top" programming services that Netflix and Amazon are rapidly expanding can continue attracting customers.
Sources tracking the merger review say a major difficulty for Comcast is in overcoming complaints about its adherence to behavioral conditions the regulators imposed on its last big deal, the 2010 acquisition of NBC Universal. As the TWC merger review has progressed, parties opposed to the deal have continually complained that Comcast failed to live up to obligations imposed on the NBCU transaction, including one to create a standalone broadband product for people who want only Internet service. Comcast was later found to have violated the conditions by creating the product but failing to actively promote it and was ordered to train call-center employees to make customers aware it was available.
In another dispute over Comcast's obligations from the NBCU deal, the FCC found in 2012 that Comcast partly violated a condition that required Comcast to place Bloomberg LP's news channel adjacent to CNBC and other news channels whenever Comcast cable systems use a "news neighborhood" on their program guides.
Sources tracking the deal say that the the regulators are concerned that Comcast will again try to find ways to skirt behavioral obligations imposed in the Time Warner deal.
A possible solution may be to impose greater divestitures than Comcast is offering. Currently, Comcast has committed to shed up to a million subscribers in a deal with Charter Communications (CHTR - Get Report) to keep its nationwide household reach below 30%, the limit the FCC once imposed on cable operators to decrease their leverage over programmers. The limit has twice been thrown out by federal judges, but Comcast said it will comply anyway. A bigger divestiture order would force Comcast to choose which of Time Warner Cable's biggest markets it values most.
One source was skeptical that Comcast would raise the divestiture totals much, given that it is under no obligation to comply with the 30% cap at all and acquiring more subscribers from Time Warner is the point of the transaction.
Complicating the regulatory review is litigation at the FCC over that agency's plan to grant limited access to confidential contracts Comcast, TWC, and DirecTV (DTV - Get Report) have with broadcast and cable TV networks to attorneys of third parties with a direct interest in these mergers. The broadcasters whose contracts would be reviewed have objected even to confidential sharing of the information and a court must rule on the dispute. But the DOJ has moved well ahead of the FCC in the past, as it did in 2011 when it filed its ultimately successful challenge to AT&T (T - Get Report) plan to buy T-Mobile USA. Although the DOJ was prepared to go to trial before FCC decisions on the merger, statements by then-FCC Chairman Julius Genachowsi indicating that the FCC would hold its own proceeding against the deal persuaded AT&T to terminate the transaction.
A Bloomberg news report stated that the Department of Justice isn't waiting on the FCC and is moving ahead with preparations to challenge the merger with a lawsuit. Antitrust officials typically begin drafting lawsuits to stop a merger that still have a chance of being approved with conditions in order to avoid delays if a lawsuit is necessary, but the Bloomberg story implied that the process in this transaction was very far along and the possible third-party witnesses already were being asked for information that could help build the case.
The DOJ in recent years has been aggressive in moving ahead with merger lawsuits that eventually resulted in a settlement with the parties. In 2013, the DOJ filed a legal challenge to US Airways Group Inc.'s $11 billion acquisition of American Airlines and its parent, AMR Corp. That deal settled three months later when all US Air agreed to give up an array of slots and gates a major airports.
Similarly, in April 2013, the DOJ reached a settlement with Anheuser Busch Inbev (BUD) and Grupo Modelo (GPMCF), allowing the companies to go through with their proposed $20.1 billion merger four months after the agency sued to block the deal.
By signaling a willingness to move forward with a lawsuit, the DOJ can greatly diminish Comcast's leverage in negotiations over conditions, one source said. The DOJ typically does not suggest remedies but waits for merging parties to offer them instead.
For their part, the companies have insisted it's too early predict a lawsuit is near, as there have been no talks over remedies yet. "Any report that Comcast has decided anything related to potential conditions on the TWC deal is unequivocally false," according to a statement issued by Comcast spokesperson Sena Fitzmaurice. "We are fascinated to know how any source can purport to know what we have supposedly decided about a request that has never been put to us, that we have not discussed with the commission, and on which we have taken no position in any forum."
Time Warner issued a formal statement Monday, stating that "the regulatory process remains fluid" but that the company would not comment "on our interim dealings with the DOJ, FCC or other regulators."
A Time Warner Cable statement provided to cable trade publication Multichannel News on Friday, however, stated that "We've had no indication from the DOJ" that it was ready to block the deal. "We've been working productively with both the DOJ and the FCC and believe there is no basis for DOJ to block the deal."
Must Read: When Must I Buy a Stock to Get the Dividend?