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Charter poised to challenge Comcast in two deals

Charter Communications is poised to close in on Comcast’s dominant position in the cable and broadband space, announcing deals Tuesday to merge with Time Warner Cable and acquire Bright House Networks.

In a complicated deal of stock and cash, Charter will buy Time Warner Cable for $56.7 billion in cash and stock to create a new publicly-traded company, “New Charter.” The transaction has a $2 billion break up fee.

Separately, Charter will buy Bright House Networks for $10.4 billion, which will also be merged into the newly-created company.

The merger of Charter, the fourth largest cable company with Time Warner, the second largest will create a bigger No. 2 in the cable industry with 23.9 million subscribers in 41 states compared to Comcast’s 27.3 million subscribers.

“With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully–featured voice products, at highly competitive prices. In addition, we will drive greater competition through further deployment of new competitive facilities-based WiFi networks in public places, and the expansion of the facilities footprint of optical networks to serve the large, small and medium sized business services marketplace,” said Tom Rutledge, president and CEO of Charter Communications. Rutledge will lead New Charter as president and CEO.

“Put simply, the scale of New Charter, along with the combined talents we can bring to bear, position us to deliver a communications future that will unleash the full power of the two-way, interactive cable network,” Rutledge said.

Regulators may have a more favorable view of the New Charter deals, especially since it provides a stronger challenge to Comcast. It all depends on what regulators define as too big in video, and especially, broadband.

Despite Federal Communications Commission chairman Tom Wheeler’s reported phone chat with Charter CEO Tom Rutledge and Time Warner Cable chairman and CEO Rob Marcus, Wheeler, in an unusual statement, warned Charter the deals wouldn’t be a slam dunk.

“The FCC reviews every merger on its merits and determines whether it would be in the public interest. In applying the public interest test, an absence of harm is not sufficient. The commission will look to see how American consumers would benefit if the deal were to be approved,” Wheeler said.

The New Pay TV/Broadband Universe
(Charter estimates in millions)

Company Video Customers Wireline Internet
AT&T + DirecTV 26.3 16.0
Charter after deals 17.3 19.4
Comcast 22.4 22.0
Dish 14.0 N/A
Verizon N/A 9.2

Charter Communications Estimates (2014)

John Malone, the fable cable entrepreneur, wanted this deal to happen.

His company, Liberty Broadband, which owns 26% of Charter Communications, is putting up $5 billion to help Charter fund the merger with Time Warner Cable and the acquisition of Bright House.

Liberty Broadband will buy $4.3 billion in stock of the new Charter corporate entity.  To get the cash, it will issue new shares in Liberty Broadband which will be purchased by Liberty Interactive Corporation and third party investors.  Liberty Interactive has separately announced that it will spend $2.4 billion to purchase the new shares of Liberty Broadband.

Liberty Broadband and Liberty Interactive, will do a tax-free exchange of the shares of Time Warner Cable common stock currently held by each company for shares of Charter corporate entity.

Liberty Broadband will also purchase an additional $700 million is shares in connection with Charter’s proposed acquisition of Bright House Networks from Advance/Newhouse Partnership.

Cable, broadband deal-making is alive and well.

The failed Comcast-Time Warner Cable may have been the catalyst, putting Time Warner Cable in play and creating the opportunity for Charter to come back for a second time to do the deal Comcast could not.  Charter’s two deals come a week after European-based Altice announced it agreed to buy Suddenlink Communications for $9.1 billion. Altice told investors the company intended to have U.S. assets represent as much as 50 percent of its revenue and was looking at all cable companies as potential acquisitions, including Time Warner Cable.

How the Charter deals come together
(Charter estimates in millions)

Company Cable Broadband Phone Total
Charter after deals 17.3 19.4 9.4 23.9
Charter 4.3 5.1 2.6 6.2
Time Warner Cable 11.0 12.3 5.6 15.2
Bright House 2.0 2.1 1.2 2.5