Is The Department Of Justice About To Deal A Blow To The Cable Industry?

In a report published Monday, Baird analyst William Power commented on various media reports that are suggesting the Department of Justice may be leaning towards rejecting a Comcast Corporation (NASDAQ: CMCSA)- Time Warner Cable Inc (NYSE: TWC) merger.

"We have been placing odds on the deal being approved as not much better than 50/50 or 60/40, with the Street at roughly 80/20 plus," Power wrote. "Continued delays coupled with net neutrality concerns had led us to already be more cautious on the deal prospects."

Power noted that Comcast would lose "significant" potential synergies, though its existing cable and NBCU businesses remain "well positioned" within the industry. Time Warner could weaken further if the deal unravels, though its share price should be "backstopped" by a "widely assumed" Charter Communications, Inc. (NASDAQ: CHTR) bid.

In fact, Charter could have the most to lose and gain, according to Power. On the one hand, its current Comcast/Time Warner and Brighthouse deals could unravel and eliminate its synergy opportunities. On the other hand, a bid for Time Warner would result in "significant scale" in the process.

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According to the analyst, "the big question" remains if Time Warner would accept a Charter bid or prefer to create value by improving its operating results itself.

Since being announced on February 13, 2014, Comcast and Time Warner shares have traded at an average implied merger arbitration discount of 7.6 percent. The spread widened on Friday from 8.4 percent to 12.3 percent after the news broke, signaling "significant concerns."

Shares of Comcast are Outperform rated with a $65 price target.

Shares of Time Warner are Neutral rated with a $154 price target.

Shares of Charter are Neutral rated with a $194 price target.