MML Webinar: How your Community Can Respond to the Comcast ... · microwave, satellite and other...

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June 2, 2014

PRESENTED BY

Joseph Van Eaton, Partner, Best Best & Krieger Michael Watza, Partner, The Kitch Firm

MML Webinar: How your Community Can Respond to the Comcast- Time Warner – Charter Transactions

©2014 Best Best & Krieger LLP

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Summary

• Brief description of the merger • Significance of merger – why local government

should join the discussion • The federal review of the merger • Local reviews of the merger • Recap and ways you can make your

participation more effective

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Description of the Merger • Step 1: First and second largest cable providers

merge – BlazeTV charted effect

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Description of the Merger • Step 2: If merger

approved, Comcast sells 1.4m TW subs to Charter, spins off 2.5m to SpinCo; Charter provides services to SpinCo., and owns significant % of SpinCo

48.96%

13.45%

9.22%

8.66%

4.56%

1.93% 1.53% 0.85%

10.84% Comcast

Charter

U-Verse

Verizon

Cablevision

Suddenlink

Mediacom

Cable ONE

All others

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Description of the Merger (cont’d) • Comcast-TW combines first and third largest

broadband providers in U.S., giving Comcast more than 30% of market

• http://www.trefis.com/stock/twc/articles/207096/broadband-will-continue-to-drive-growth-for-time-warner-cable/2013-09-25

• Merger occurs at parent level, Comcast stock for TW stock (1 share TW = 2.875 Comcast)

• Valued at $45 billion

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Description of the Merger (Cont’d)

• TWC shareholders will control about 23% of Comcast common stock

• Comcast will control all of TWC franchisees Local franchisees will remain the same BUT about

3 million subscribers divested • The merger requires federal approval. It may

also require local approval or state approval depending on franchise

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Before/After

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Description of the Merger (Cont’d) • Charter deal ONLY goes forward if TWC-Comcast

merger approved • Several pieces: Charter must raise financing to BUY 1.4m former TWC

subs Charter and Comcast SWAP 1.6m TWC-Charter subs to

give greater regional control to Charter and Comcast Comcast spins off 2.5m subs to a new company,

SpinCo Charter owns 33% of SpinCo; SpinCo independently

managed but Charter provides co-branded services to SpinCo customers

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Description of the Merger (Cont’d) • Transaction will trigger transfer filings with many localities, FCC and DoJ; but those

filings not yet made, nor is it clear whether transaction will involve sale of assets to SpinCo, or a change of control of local systems (see below)

• Information:

http://phx.corporate-ir.net/phoenix.zhtml?c=112298&p=irol-irhome (joint presentation to investors)

http://corporate.comcast.com/twctransaction (Comcast site)

• Complex transaction: Charter must raise $7.3 billion to buy former TWC systems by time certain; Charter provides stock in return for 33% share of SpinCo; SpinCo provides stock in return for assets from Comcast; SpinCo must raise specified level of debt for deal to move forward; Comcast and Charter shareholders must approve

• Conditions also include requirements for local approvals: (i) for the Comcast swap

systems and the Charter purchase systems in the aggregate, 80% of video subs; (ii) for SpinCo systems, 85% of subs; (iii) for Charter swap systems, 85% of sub.

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Description of the Merger (Cont’d)

• SpinCo merges with Charter subsidiary “merger sub;” Charter pays SpinCo shareholders for 33% of SpinCo shares in exchange for 13% of Charter shares. Historic Comcast Shareholders (not including TWC shareholders) must hold 50.75% of SpinCo

• Management of SpinCo - 9 board members post merger.

3 independent directors selected by Comcast, acceptable to Charter; 3 independent dir. selected by Comcast from Charter list; 3 dir. from Charter merger sub

• SpinCo retains Charter to provide specified services (including: corp. services, network

ops, engineering & IT, voice operations, field ops, customer service, billing & collections, product, marketing, sales, business intel, IP licensing) under supervision of SpinCo's Board and execs

• Independent (non-Charter) management team. SpinCo to keep employees and

operations intact in order to qualify for beneficial tax treatment and may provide some services to Charter where SpinCo has a “larger field operations presence than Charter”

• Compensation to Charter = cost plus 4.25% of SpinCo quarterly gr. revenues. Services

agreement = 3-year term, renews for 1 year terms; limits on other transactions • Comcast limited to 1% SpinCo o’ship for 8 years; Charter limited to 49% o’ship for 4 years

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Description of the Merger (Cont’d)

• Effectively consolidates systems and clusters: Comcast gains in California, New England,

Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia. Charter gains in Ohio, Kentucky, Wisconsin,

Indiana, and Alabama SpinCo in Michigan, Minnesota, Indiana, Alabama,

Eastern Tennessee, Kentucky and Wisconsin

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Description of the Merger – the new Charter

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Why Local Government Needs to Join the Discussion

• This deal will define the future structure, prices and availability of video and broadband in the nation and in your community.

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Does the Deal Help or Hurt the Video Delivery/Broadband Market?

• The Comcast “public interest” statement (filed with FCC) This deal enhances scale and scope economies. These “enhanced revenues” (i.e. profits) will

stimulate new services and technologies.

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Does the Deal Help or Hurt the Video Delivery/Broadband Market? (Cont’d)

• Economies of Scale and Scope Warren Buffett: invest in companies with “moats”

that protect against competitive entry. • i.e. expect super profits, unchallenged by competitive

entry. Good for shareholders is not necessarily good for

customers and suppliers.

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Does the Deal Help or Hurt the Video Delivery/Broadband Market? (Cont’d) Core issue: Do economies of scale (reduced costs

per dollar invested) and economies of scope (increased revenues per dollar invested) help or hurt? • Shareholders vs. customers • Innovation • Competitive Entry • “The Social Contract”

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Economies of Scale and Scope: Good or Bad?

• Last major national debate was AT&T Divestiture (1973-1984)

• Question: Should AT&T Be Granted a National Monopoly License for Telecommunications?

• AT&T made same arguments as Comcast today: economies of scale and scope allowed intrasystem subsidies to support the “Social Contract” Universal service

Bell Labs innovation

National telephone long distance rate averaging. • Opponents argued AT&T system dominance nationally and locally prevented direct competitive entry in long distance (MCI)

Inhibited product and service innovation (cellular rollout and Carterphone)

Threatened destructive cross-subsidies of computer services (Computer I and II) • Conclusion: Breakup the AT&T system Regulate the “last mile” copper networks that enjoyed scale economies

Divest Bell Labs and Long Distance and Computer Service (“competitive lines of business”) to avoid anti-competitive cross-subsidies

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Lessons from AT&T Debate • Do Local Consumers Have Effective Alternatives to “last mile” cable

broadband networks? For video? For hi-speed data? Can users of high speed internet access avoid cable infrastructure? Can video consumers avoid cable infrastructure? If no effective alternative, expect:

• Discrimination in service terms and availability. • Prices in excess of competitive levels.

• Do Suppliers (Programmers and Equipment) Have Market Access

without Comcast? “If Comcast won’t buy my service, there won’t be a market.” If Comcast won’t provide me connections, I can’t reach my customers.” If no effective alternatives, expect:

• Discrimination in market place. • Comcast prices tied to value of service rather than cost of service.

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This is a Local Issue • Economists predict unregulated providers with

strong economies of scope and scale will: Set customer service at prices that maximize

return on investment (ROI) These price/service levels may not satisfy

customer demand

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This is a Local Issue (Cont’d) • Rate and Service Discrimination

Local video and broadband entrepreneurs may experience problems accessing the cable network

Local consumers may face discriminatory prices unrelated to supply constraints

• Discrimination against Local community programming Cable operator may not offer VOD, HD, or adequate financial support

for community programming

• Discrimination against high-cost regions/customer groups

• Anti-Competitive treatment of overbuilders (including municipal systems)

• Limited market access for Programmers and product vendors

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Many of These Issues Can Be Addressed Through Local Actions

• If there is local review authority by denying or conditioning approval of the transfer. Fix all franchise non-compliance issues Consider, provided you have franchise and/or ordinance authority to do so:

• Build-out requirements • Non-discriminatory/uniform rate requirements • Upgrades to the local system • Support for local programming • Customer Service conditions

• Joint actions before federal regulators and antitrust authorities.

Seek federal conditions on any approval of the deal

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The Federal Process *

And Where You Can Make Your Voice Heard

* Many thanks to Andy Schwartzman for his paper on this subject.

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Appl

icat

ion

File

d F.C.C. Communications Act Transfer licenses requires public interest.

Approve

Disapprove

Condition

Justice Clayton Act/Hart Scott Rodino/Sherman

Cannot lessen competition

Approve

Disapprove

Condition or Consent Decree FTC Clayton Act/Federal Trad

Commission Act Cannot lessen competition

Flow Chart of the Process

Clayton Act, 15 U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. § 1, 2, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45

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Department of Justice • Jurisdiction -- Under Clayton Act merging companies do not technically need DOJ’s permission

to consummate a transaction, but if DOJ does not approve, DOJ can ask dist. ct. to enjoin transaction break up combination Hart-Scott-Rodino (HSR) Act established procedures for DOJ review Parties must file information about the deal with the DOJ. They may not close on the

purchase for 30 days, and for longer when DOJ requests additional information

• DOJ’s review is not a transparent process. There is a page of guidance. Actions are conducted in private ( See http://www.justice.gov/atr/public/guidelines/hmg-2010.html)

1. DOJ’s Antitrust Division will conduct an investigation, during which it will ask for submission of tens of thousands of pages of documentation, perhaps conduct depositions, and engage in detailed discussion with the parties

2. It will also consult with competitors and other affected parties 3. None of these activities are a matter of public record, and the DOJ generally refuses

to issue any public statements during its investigation 4. William Baer, the current Assistant Attorney General, represented Comcast in the

Comcast/NBC Universal litigation and has recused himself 5. Renata B. Hesse, a principal deputy assistant attorney general, whose credentials

include rejecting the Federal Communications Commission’s investigation of AT&T’s proposed takeover of T-Mobile will lead

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Department of Justice • Conclusion of Process:

1. DOJ may announce that it will not object to deal 2. DOJ may file suit in fed. dist. ct. to enjoin the deal 3. DOJ may enter into a consent decree with Comcast,

requiring that Comcast agree to certain divestitures or modifications of the deal and to specific steps designed to minimize anti-competitive harms.

4. (Under the Tunney Act, a consent decree does not become final until interested parties have a right to file objections to it, but Courts rarely modify consent decrees before approving them.)

• Time Frame: Experts estimate that the DOJ investigation will take at least eight months.

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FCC Communications Act

• Jurisdiction -- Communications Act poses a separate and some feel higher standard for approval of the transfer of the hundreds of licenses (e.g. microwave, satellite and other licenses,) from Time Warner to Comcast.

• Standard: Comcast bears the burden of proving that the deal is in the

“public interest, convenience and necessity.” Public interest standard offers FCC greater latitude than the DOJ has. FCC can base its actions on a determination of what the deal’s approval might

do to affect the diversity in the marketplace of ideas, competition or localism. Commission decision is afforded considerable deference.

• Process Companies required to file a detailed application listing:

• All of the affected licenses. • Details about the terms of the transaction. • Explanation as to why transaction is in the public interest. • Done for TW-Comcast merger, not for Charter deal yet

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FCC • FCC has opened a docket – MB 14-57 for Comcast-TW merger • Application materials available for public review on FCC website

http://apps.fcc.gov/ecfs/proceeding/view?name=14-57

• FCC announced Charter transaction will be consolidated in docket • Opponents of the transaction will have right to file “petitions to

deny” approval of the application. Time for filings not yet set • Conclusion of Process (Staff Recommends/Commissions Vote)

Approve Disapprove Condition Approval

• Dissatisfied parties can appeal FCC action to the United States Court of Appeals for the District of Columbia Circuit.

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FCC Transition Team Page (Not Yet Posted for Comcast-Time Warner-

Charter)

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How to File Comments at FCC • Use the cover – or include

the docket number. • You can find detailed

instructions on how to file comments, and to where you should send those comments, on the Public Notice announcing the transaction and seeking comment.. http://apps.fcc.gov/ecfs/upload/display?z=dmfz7

• Make sure to copy Transaction Team

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FCC Service List (Per DA 14-479– Service by Email/Fax/mail)

• Best Copy and Printing, Inc. (FCC@BCPIWEB.COM ) • Vanessa Lemmé, Industry Analysis Division, Media

Bureau, (Vanessa.Lemme@fcc.gov ) • Marcia Glauberman, Industry Analysis Division, Media

Bureau, at (Marcia.Glauberman@fcc.gov ) • William Dever, Wireline Competition Bureau

(William.Dever@fcc.gov) • Jim Bird, Office of General Counsel

(TransactionTeam@fcc.gov ) • Each Commissioner or Commission employee who

attended or otherwise participated in the ex parte meeting.

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What Makes Filing Effective

• Understand FCC review standard and tailor issues to that standard

• Very helpful to submit or cite expert reports to support claimed harms (remember, companies can respond to your filings Economic analysis of local harms may be particularly important FCC will be less concerned with issues that can be addressed at

local level – unless clear tie to issues with which it is concerned Same analysis can be used at local level – combined with

assessment of financial analysis of transaction • Joint action can allow studies to be conducted, but also

make it clear FCC should consider local concerns

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The Local Process: How It Applies

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Local Review • Local authority to review is affected by Cable Act

and FCC rules, state law and the local law/franchises

• Federal rules affect process – not the substance of review 120-day deadline once a complete “Form 394” is filed

– but deadline can be extended 30 days from receipt of application to notify operator

locality questions whether Form 394 is accurate (and complete) Failure to act by deadline = approval is deemed

granted.

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Local Review (Cont’d) • Relevant statutory provision = 47 U.S.C. Sec.

537; relevant FCC regulation = 47 C.F.R. Sec. 76.502

• Leg history to Cable Act suggests a franchising authority ensure transferor is in compliance as part of transfer process, and that transferee (absent agreement) cannot be held responsible for predecessors omissions at least for purposes of renewal

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Local Review (Cont’d) • Whether you have authority to review will

depend on state law (more below) AND your local franchise Some franchises require approval of transfers of

franchise or franchisee, but do not require approval of changes in parent company control Setting aside state law concerns, you will need to

determine whether the local franchise reaches changes of control or similar changes – and whether it would reach the proposed transactions

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Local Review (Cont’d) • The second issue: what is a change of control

under the franchise? What sorts of changes of control are subject to review? For Comcast, answer likely depends on whether

amount of stock being transferred to TWC shareholders is change of control For Charter, may be an asset transfer (actual transfer

of franchise or system) – but if transaction set up at parent level, answer depends on how change of control is defined – working control appears to be changing

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Reviewing the Transfer Request • Federal law does not establish substantive

standards • Franchises or local laws often do • Scope of review therefore depends on limits of

franchise Public interest standard? Financial, technical, legal, and character qualifications? Impact on cable competition? (see 47 U.S.C. Sec.

533(d)) • Your review should be tailored to your authority

and federal requirements – admittedly tough to do in MI

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Local Review • In Charter Communs., Inc. v. County of Santa Cruz,

304 F.3d 927, 933 (9th Cir. 2002), the court found that a denial “should be upheld as long as there is substantial evidence for any one sufficient reason for denial.”

• Effect: subject to contractual limitations, localities have significant authority to address outstanding performance issues and to ensure transfer will not harm the public or reduce competition in the delivery of cable service

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MICHIGAN • This discussion applies to most Michigan

Comcast areas and possibly Charter areas • Because of PA 480, Do Not Wait for 394

Forms • Watch for any notices of transfer/name

change etc. • Review your current/former franchise for

transfer authority • If uniform franchise: Did you preserve rights?

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MICHIGAN LAW

PA 480 484.3305 (5)

(1) As of the effective date of this act, no existing franchise agreement with a franchising entity shall be renewed or extended upon the expiration date of the agreement. (3) On the effective date of this act, any provisions of an existing franchise that are inconsistent with or in addition to the provisions of a uniform video service local franchise agreement are unreasonable and unenforceable by the franchising entity. 484.3303(4) A “uniform … franchise agreement … or an existing franchise … is fully transferable to any successor in interest to the provider ... A notice of transfer shall be filed … within 15 days of … completion …” 484.3313 This act does not prohibit a local unit of government and a video service provider from entering into a voluntary franchise agreement that includes terms and conditions different than those required under this act…

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DETROIT v COMCAST Michigan Attorney General

“The Michigan Act permits a franchising entity to deny a franchise proposal even if it is a uniform agreement. This is a reasonable interpretation … the Michigan Act does allow franchising entities and cable operators to enter into a voluntary agreement that "includes terms and conditions different than those required under this act . . . ." This provision of the Michigan Act allows franchising entities and cable operators to work outside the framework of the uniform agreement to negotiate an entirely different franchise agreement. Thus, a franchising entity would be fully within its rights to deny a cable operator's proposal and work towards achieving a voluntary agreement. The City's contention that the Michigan Act precludes this approach is wholly without merit…” -Michigan Attorney General Brief - Case 2:10-cv-12427-DML -VMM Document 59 Filed 06/17/11 Page 35 of 38

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DETROIT v COMCAST Detroit District Court Opinion

“The Court also finds that the state attorney general has offered a construction of the Act that avoids a conflict with the state constitution, that is, that municipalities may refuse to approve a franchise renewal application and negotiate acceptable terms with the cable provider, without the standard form agreement automatically taking effect.” - 2:10-cv-12427-DML-VMM Doc # 76 Filed 07/10/12 Pg 2 of 42 Pg ID 2076

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DETROIT v COMCAST Detroit District Court Opinion

“The Court also finds invalid on federal preemption grounds the provisions of the Michigan Act addressing the modification of Existing franchise agreements…” -2:10-cv-12427-DML-VMM Doc # 76 Filed 07/10/12 Pg 2 of 42 Pg ID 2076

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MICHIGAN SCENARIOS 1. Agreement with Comcast regarding enforceability of existing franchise with transfer authority 2. Existing franchise in place with transfer authority - No Uniform Franchise Yet 3. Uniform franchise with reservations properly preserved re prior franchise with transfer authority 4. Uniform franchise without reservation with prior franchise with transfer authority

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REALISTIC GOALS?

Major concerns for Michigan municipalities a) Maintain I-Nets b) Withdraw objections to Muni BB c) Maintain Franchise and PEG Fees d) Free Drops/Connections/Transmission/Playback e) HD for PEG f) VOD for PEG g) Reasonable customer service h) ???

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STRATEGY

1. Enforce Franchise Transfer Authority a) Comcast will likely oppose your authority in

order to block 2. File Comments at FCC and/or DOJ and/or FTC

a) Comcast will oppose the substance in its own comments, but no basis to block yours

3. Negotiate Conditions on deal(s)

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Questions?

Joseph Van Eaton Best Best & Krieger LLP 2000 Pennsylvania Avenue N.W. Suite 4300 Washington, DC 20006 (202) 370-5306 Joseph.VanEaton@bbklaw.com

Michael J. Watza Kitch Drutchas Wagner Valitutti & Sherbrook 1 Woodward 24th Floor Detroit, MI 48226 Mike.Watza@Kitch.Com (313)965-7983 M:(248)921-3888