FCC lifts restrictions on cable/CLEC mergers, acquisitions

September 17, 2012 | By Sean Buckley

The Federal Communications Commission on Monday paved the way for cable operators to purchase CLECs to expand their business service footprints by granting forbearance from Section 652(b) of the Communications Act.

By granting limited forbearance from Section 652(b) of the Communications Act, the FCC said it would "harmonize the rules that apply to transactions between competitive LECs and cable operators regardless of which entity acquires the other."

Section 652(b) prevented a cable operator from acquiring more than a 10 percent stake in local exchange carriers that provide service in their franchised areas unless all impacted local franchising authorities agree to a waiver of the provision.

Since section 652(a) only applies to acquisitions by LECs that were providing telephone exchange service as of January 1, 1993, the FCC said that the "definition effectively excludes acquisitions by most or all competitive LECs, as they were not providing such service by that date."

In its order, the FCC said that "mergers between cable operators and competitive LECs, both of which usually are non-dominant providers of telecommunications services, potentially serve many pro-competitive goals and appear consistent with the purpose and history of section 652. Streamlining the regulatory approval process for such transactions--without eliminating the important safeguards of the Commission's review of such mergers--can enhance facilities-based competition and spur technological innovation and investment that will benefit consumers."

Rumors of the FCC ruling to grant forbearance on 652(a) emerged last week in a Stifel Nicolaus report indicating that the FCC would approve the NCTA's request for forbearance request from Section 652. However, individual states and the FCC would still state regulators would examine deals to see if they are in the public interest.

This ruling follows a petition that the National Telecommunications & Cable Association (NTCA) made last August with the FCC that said CLECs and cable operators should not be subject to the Telecom Act's cross-ownership prohibitions.

The Broadband Coalition, a competitive telecom industry group, hailed the FCC ruling.  

"Everyone wins when there is more competition in the marketplace," said Chip Pickering, a former U.S. Congressman and spokesman for The Broadband Coalition, in a statement. "This decision today strengthens the position of broadband providers to compete with ILEC services. When competition thrives in the broadband marketplace, innovations occur benefiting businesses of all sizes. This is true for new innovations such as cloud technology."

While cable operators haven't been as aggressive on the M&A side as some of the traditional ILECs, Comcast (Nasdaq: CMCSA) and Time Warner Cable (NYSE: TWC) have made a few notable deals in recent years to enhance their business services presence.

Comcast, while still a relative newcomer in the business services arena, enhanced its ability to target larger businesses by purchasing both acquiring both Cimco and NGT Telecom. Coupled with their own aggressive build out of fiber facilities and Ethernet, the Cimco acquisition immediately gave it an entree into the medium-sized business market, while NGT Telecom acquisition gave it enhanced VoIP services.

No less compelling was Time Warner Cable's acquisition of NaviSite, a provider of enterprise-class hosting, managed application, messaging and cloud services.

Cable operators may lack the pull of a large telco, but one of the things they do have is an aggressive spirit and a lack of legacy services that, for example, telcos must cannibalize when they earn a new Ethernet customer.

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