Collapse of Comcast-Time Warner Cable Deal May Chasten Wall Street

Comcast Corp's failed bid to buy Time Warner Cable Inc is the latest muscle flex by U.S. antitrust enforcers and will likely deter chief executives from pursuing aggressive transactions as a way to spend excess cash.

Comcast, which had barely convinced regulators to allow it to buy NBC Universal four years ago, folded under pressure from the Federal Communications Commission and the Department of Justice and scrapped its deal to buy its No. 2 rival on Friday.

It comes two months after the Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department, sued to block Sysco Corp's proposed deal to buy its biggest rival US Foods. A court fight is ongoing.

The one-two punch from regulators shows the U.S. government is reluctant to approve deals that will take out a main rival in industries with few competitors, and could prompt companies to eye deals outside their core areas or their home markets, dealmakers say.

Spencer Kurn, analyst at New Street Research, said the government sent Comcast a clear message that they are too big right now, and the company is going to be hesitant to put deals in front of regulators where they could gain scale.

"Before the (Time Warner Cable) deal came about, Comcast was looking internationally and said that they hadn't found anything attractive to them. Given the restrictions in the U.S. they are likely to resume looking internationally again," he said.

Perceptions of a bigger regulatory threat could also make buyers more risk averse and push them to lock in stronger protections, such as securing consent from sellers that they do not have to pay penalties if regulators shoot down a deal. Comcast, for example, has emerged relatively unscathed from the deal collapse since it does not have to pay the so-called reverse break-up fee.

Meanwhile, AT&T had to pay $6 billion in cash and assets to T-Mobile when regulators killed its planned purchase of the smaller rival in 2011.

"What's going to happen is that Wall Street will continue to go forward with some trepidation, trying to do some big deals," said Carl Hittinger, an antitrust expert at law firm Baker & Hostetler LLP. "People are going to hesitate."

Indeed, the abortive bid for Time Warner Cable follows the public scuttling of AT&T's T-Mobile bid, as well as the quiet dismissal in 2014 of ambitions by SoftBank Corp, Sprint's owner, to buy rival T-Mobile.

In that instance, SoftBank decided not to make a formal bid for T-Mobile after both FCC chairman Tom Wheeler and the Justice Department's antitrust chief expressed scepticism about a merger between any of the top four wireless phone companies.

"One lesson for everyone: Don't get too greedy," said a top mergers and acquisitions lawyer who asked not to be identified to protect business relationships. "If you go from having four players in the market to three players, the government is going to be tough on you."

Given a tough regulatory atmosphere, some companies are planning to hold off with aggressive deals until after the next presidential election, hopeful that a potential Republican administration will be less aggressive in blocking mergers, people familiar with the discussions said.

"This is an administration that is clearly looking at things very closely," said Mike McCormack, a managing director at Jefferies. "It does seem the administration is less friendly to big business."

Diana Moss, president of the American Antitrust Institute, said that many key industries such as telecommunications and food distribution are too consolidated as a result of years of mergers and may have little space for further tie-ups.

To be sure, more deals will get done than not and bankers pointed out that deals such as Comcast-Time Warner Cable and Sysco-US Foods, which would reduce the number of direct competitors in given markets, would have struggled under any administration.

Another mega deal pending regulatory review, the proposed tie-up of AT&T and DirecTV, will likely go through, analysts and bankers say.

"Outside of the fact that you are talking about two massive deals, there really aren't any comparisons to make between the two deals. We feel fairly comfortable that the deal will get done," Angelo Zino, analyst at S&P Capital IQ, said of the AT&T deal.

© Thomson Reuters 2015