Something that I have so far not done much in these posts but that I have historically liked to do is formulate speculative ideas. I like to think outside the box as much as I can, and let my mind wander a bit further once in a while. Comcast Corporation (NASDAQ:CMCSA) is widely expected to announce as early as today that it is no longer pursuing plans to acquire Time Warner Cable Inc (NYSE:TWC). According to key newswires, regulatory opposition (in the form of an FCC ‘administrative hearing’ per Bloomberg) is too stiff against the notion of the formidable behemoth that would emerge from the combination of Comcast and Time Warner Cable.
In Mexico, America Movil SAB de CV (ADR) (NYSE:AMX) has for years now been facing severe regulatory challenges of its own due to its large size and ‘market dominance’. AMX has in fact been pushed to the process of plans to shed assets in order to fully comply with the new telecom law, widely believed to have been crafted specifically to curb AMX’s market power. The substantial convergence of the traditional telecom and cable television industries has resulted in both Comcast and AMX offering at least ‘triple-play’ telecom and media services in their respective markets.
Both companies have spent substantial multibillion dollar fortunes in infrastructures dominated by fiber optic networks to deliver broadband services to their customers, enabling them to have high-speed internet, in addition to fixed telephony and media access. America Movil, originally the mobile telecom operator of the parent company it ended up absorbing (Telmex), expanded well beyond cellular service. In countries where it is allowed to do so, it offers cable TV services. In Brazil, it is actually the leading CATV company, making AMX a strong ‘quad-play’ services provider.
Comcast and America Movil built extremely strong positions in their respective markets, having started out with franchise territories (or concessions). This has opened them up to criticism of monopoly-like practices. Nevertheless, telecom/media convergence and other technological and regulatory developments have resulted in the two behemoths facing increasingly stiff competition. ‘Over-the-top’ services, including the new offering by HBO, not to mention the fact that millennials have increasingly ‘cut the cord’ and do much of their ‘TV viewing’ online (and for the most part do not plan to own a fixed telephone line), put Comcast’s and AMX’s traditional ‘monopolies’ very much at risk.
In fact, the regulatory opposition to the Comcast/Time Warner Cable combination ended up being somewhat surprisingly strong, given that the little in-market overlap would have been shed, and traditional franchise regions meant that one of the key reasons for Comcast to want the Time Warner assets was the former’s lack of presence in the major markets of New York and Los Angeles.
Now that it is increasingly clear that both America Movil and Comcast will be unable to acquire any meaningful assets in their respective countries of origin, should they consider merging with each other? Just like convergence took place between their original industries, convergence will continue and in the long term significantly advance between the US and Mexico. Already joined in free trade through NAFTA, these two North American markets are increasingly economically integrated and demographically continue to approach each other in many ways, straddled by the increasingly formidable US Hispanic population.
A close long-term ally of (and investor in) AMX, AT&T Inc. (NYSE:T) is distancing itself from its former close partner in Mexico. The catalyst was T’s pending acquisition of satellite TV giant DIRECTV (NASDAQ:DTV), as assets this company owns in Latin America are increasingly direct competitors of AMX. T has then accelerated this process by announcing plans to acquire both Iusacell and Nextel Mexico, eventually making it a serious player in mobile communications south of the border.
The break-up of the old AT&T (“Bell”) system through telecom ‘reform’ last century in the US (just like the break-up of the old Telebras in Brazil) is literally a thing of the past. Giants have been ‘re-formed’. In the case of the US, this process has arguably been led by the old SBC (once known as Southwestern Bell), the original Telmex partner, which bought its original parent , and assumed its official historic name and brand following the acquisition.
The ‘other’ US market leader from the original telecom industry is of course Verizon Communications Inc (NYSE:VZ), which traces its origins back to Bell Atlantic, made ever more formidable by the full acquisition last year of the substantial minority position (45%) Vodafone had in Verizon Wireless (which dated back to when Vodafone owned AirTouch, which itself had been formed by the spin-off of certain cellular assets out of the Pacific Telesis “Baby Bell,” which itself eventually became part of what is now T through SBC!).
As alliances shift, industries collide and then converge, economic, geographic and demographic borders blur, I believe it is time for AMX and Comcast to explore a merger. Admittedly, it would be challenging to pull it off. Both companies have less-than-ideal corporate governance practices with strong controlling shareholders. The Roberts at Comcast and Slims at AMX have a tight grip on their companies, meaning a merger of these two NAFTA ‘TMT’ giants would only be conceivable as a friendly one. With increasingly strong rivals in a converged ‘industry’ that increasingly requires global scale (and their inability to grow any more through M&A in their own respective countries of origin), Comcast and AMX would be better off in the long run if their combined their assets and expertise.