Reader Question: Why did Comcast stock prices fall after TWC merger announcement?

Comcast announced a premium ($26/per share higher than Charters last bid based on Wednesday's closing prices) to encourage Time Warner shareholders to approve the deal.

Comcast's "Board of Directors have approved a definitive agreement for Time Warner Cable to merge with Comcast. The agreement is a friendly, stock-for-stock transaction in which Comcast will acquire 100 percent of Time Warner Cable's 284.9 million shares outstanding for shares of CMCSA amounting to approximately $45.2 billion in equity value. Each Time Warner Cable share will be exchanged for 2.875 shares of CMCSA."

As of Wednesday's close that meant...

  • TWC $135.31
  • CMCSA $55.24
  • Equivalent value: ($55.24)(2.875) = $158.82
  • Premium of $158.82-$135.31 = $23.51

That's a pretty big gap, so the market is adjusting now...

  • TWC $145.15
  • CMCSA $53.25
  • Equivalent value: ($53.25)(2.875) = $153.09
  • Premium of $153.09-$145.15 = $7.94

There are some concerns about regulator approval of the deal (meaning the announced deal might not happen - like AT&T/T-Mobile or the early talks of American/USAir) which has been the suggested reason that the the premium hasn't closed faster through the day.

NOW... Here's the basic supply/demand explanation.

At the time the deal as announced if you sold off 1,000 shares of Comcast to buy shares of TWC this is what would have happened.

  • ($55.24)(1,000) = $55,240
  • $55,240/$135.31 = 408 shares of TWC

Let's say the market eventually equalizes to something like this right before the deal goes through:

  • TWC $148.00
  • CMCSA $51.50
  • Equivalent value: ($51.50)(2.875) $148.06
  • Premium of $148.06-$148.00 = $0.06

Your 408 shares of TWC will become 1173 shares of CMCSA worth $60,409.50.

Had you kept your 1,000 shares of CMCSA throughout it would be worth $51,500.00.

So, if you anticipate the deal actually happening, the smart bet is to sell off your Comcast shares to buy Time Warner shares. From basic economics we know the supply of shares remains the same, but demand for TWC will go up and demand for CMCSA will go down. Thus the share price for TWC will go up and the share price for CMCSA will go down.

SIDE NOTE: Because a drop in share prices causes the average joe to panic, CMCSA also announced a stock buy back which will reduce supply of CMCSA

Sources:

  1. http://www.cmcsa.com/releasedetail.cfm?ReleaseID=825483
  2. http://www.google.com/finance?q=NASDAQ:CMCSA
  3. http://www.google.com/finance?q=NYSE%3ATWC
  4. http://www.reuters.com/article/2014/02/13/us-comcast-timewarnercable-idUSBREA1C05A20140213