President Barack Obama's call for an open and unrestricted Internet scared investors in cable companies across the board. He also sparked fears that Comcast would walk away from its deal to buy Time Warner Cable.
Shares of Comcast, the parent of CNBC, fell 4 percent Monday, the day of Obama's announcement, while Time Warner Cable fell 5 percent. As a result of the moves, Time Warner Cable closed at the furthest point from Comcast's implied all-share offer since the takeover was announced in February.
Here's the math: Time Warner Cable closed Monday at $136.50, while Comcast's offer of 2.875 Comcast shares per Time Warner Cable share implied a takeover price of $152.23 per share. The gap of $15.73 per share compares with an average of about $8.67 since the deal was announced and a low of $4.38 on April 10.
The gap widened even further with Tuesday morning trading.
What's scaring investors? Obama, who doesn't control the Federal Communications Commission but appointed its chairman, urged the FCC to set the "strongest possible rules" to protect so-called net neutrality. Net neutrality is viewed as potentially harmful to Internet providers because companies like Netflix could theoretically use limitless amounts of broadband without compensating companies that provide the infrastructure.
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While Comcast was keenly aware of the potential for unfavorable regulation surrounding net neutrality, Obama's announcement came as shock. If he succeeds in pushing for such rules, Time Warner Cable could theoretically become a less attractive target because it would increase Comcast's exposure to cable.
At the moment, roughly 80 percent of Comcast's earnings before interest, taxes, depreciation and amortization come from cable distribution assets, according to John Tinker, an analyst with Maxim Group. But if the deal closes, the percentage will rise to about 85 percent, Tinker estimates. Comcast and Time Warner Cable declined to comment to CNBC.com.
Comcast could probably walk away from the deal without difficulty if it decided to. The terms of the agreement don't require Comcast to pay any breakup fee if the deal collapses. The merger is currently under an antitrust review, and Comcast has said it expects the deal to be finalized in 2015.
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The details of the FCC's decision probably won't be known for months, so there's little reason for Comcast to make any hasty decisions. And as Benjamin Swinburne of Morgan Stanley points out, Obama didn't mention any of the most critical policies that should concern cable investors. Neither pricing controls nor usage-based pricing limits were part of the president's message.
And in a sense, it's better for the government to lay down any new net neutrality rules before Comcast and Time Warner Cable complete their deal. The alternative might be that Comcast and Time Warner Cable be forced to accept company-specific rules in order to get the green light from regulators.
With so much uncertainty, Time Warner Cable shares could remain fragile for some time.