Charter Communications has reeled in its big prize, agreeing to buy Time Warner Cable in a blockbuster deal that would make it the third-largest pay TV provider in the nation.
The long-sought-after acquisition, announced early Tuesday, values Time Warner Cable at $56.7 billion. Charter also is planning to buy Bright House Networks, a smaller cable provider, producing a new company with more than 20 million pay TV, Internet and phone subscribers in 41 states.
The deal will need federal and state government approval. However, it is considered more likely to clear regulatory hurdles than Comcast’s recently scuttled purchase of Time Warner Cable.
That’s partly because the combined company would be smaller than the proposed merger of Comcast and Time Warner Cable, especially in providing Internet access. Charter said the combination, along with its purchase of Bright House, would create a company serving less than 30 percent of U.S. subscribers to high-speed Internet service. That figure was 57 percent in the deal Comcast abandoned last month under pressure from regulators concerned about preserving online competition to traditional cable video.
The Charter deal doesn’t pose the same harm to the broadband market, agreed Jonathan Chaplin, an analyst with New Street Research. In a note to investors Tuesday, he listed further characteristics in the deal’s favor: Comcast owns NBCUniversal and Charter doesn’t have content assets, Charter doesn’t have a history of disputes with online providers such as Netflix and it hasn’t been accused of violating behavioral requirements set in previous mergers.
Still, the deal would create a company with national scale, serving 23.9 million customers in 41 states, compared with cable leader Comcast’s 27.2 million.
“One has to be sober about genuine risks that this deal could still be rejected,” said Craig Moffett, an analyst with MoffettNathanson. “Simply being smaller than Comcast may not be safe harbor.”
Tom Wheeler, chairman of the Federal Communications Commission, said Tuesday his agency must review every telecommunications merger to determine “whether it would be in the public interest.”
“In applying the public interest test, an absence of harm is not sufficient,” he said. “The commission will look to see how American consumers would benefit if the deal were to be approved.”
Charter, backed by cable pioneer John Malone’s Liberty Media Corp., already had assembled a $10.4 billion deal to buy privately held Bright House Networks, which has more than 2 million subscribers.
The announcement represents the latest in a flurry of takeovers in the sector as companies struggle to keep pace with changes in how Americans watch and pay for television. As customers increasingly stream videos through the Internet, cable providers have sought deals to gain scale and greater bargaining power with content providers.
“The timing of this deal clearly shows how desperate Time Warner Cable is to be acquired,” said Paolo Pescatore, an analyst with the technology research company CCS Insight. “A tie-up with another cable provider makes perfect sense given the altering landscape in the broadcast industry.”
If the deal is completed, the combined company will be named New Charter and its services will be sold under the brand name Spectrum. Time Warner Cable is the dominant cable TV provider in the Kansas City market.
The flurry of high-profile deals delivers on Charter’s ambitions to quickly transform itself into one of the nation’s most powerful Internet service and cable TV providers. The move also represents a triumph for Malone, who was a key architect of the cable TV industry as it consolidated in the 1990s.
The Colorado billionaire has kept his eye on Time Warner Cable for the last two years. It first appeared that Malone and Charter had been outmaneuvered by their longtime rivals at Comcast, but when that deal collapsed last month, Charter swooped in.
With the Time Warner Cable and Bright House subscribers added to the mix, Charter would wield considerable clout — including more than 19 million high-speed Internet customers nationwide, 17.3 million cable TV customers and a growing portfolio of commercial customers who sign up for phone and Internet service.
“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,” said Tom Rutledge, Charter’s chief executive, who will run the consolidated company.
If the deal is approved, Charter will trail the proposed combination of AT&T and DirecTV — a deal that is waiting final approval from federal regulators — as well as Comcast, which would become the second-largest pay TV provider.
“I’m confident that our proposed transaction will gain the approval of federal regulators,” Rutledge told analysts during an early morning conference call.
The cash-and-stock deal values Time Warner Cable at $195.71 a share, significantly higher than its $171.18-a-share closing price on Wall Street on Friday. Time Warner Cable stock closed Tuesday at $183.60, up $12.42, or 7.26 percent. Charter’s shares closed at $179.78, up $4.45, or 2.54 percent.
The deal requires Charter to pay at least $56.7 billion for Time Warner Cable’s outstanding shares. Charter also would assume Time Warner Cable’s $22 billion in debt, bringing the total amount to $78.7 billion. The transaction would be highly leveraged, requiring Charter to secure financing of about $30 billion. To help with the financing, Liberty has agreed to spend as much as $5 billion to buy shares in the new Charter.
What’s in it for consumers?
Jeff Wlodarczak, an analyst for Pivotal Research Group, says the deal could be a net positive for consumers. Some of his reasons, and Charter’s, in making its case:
▪ Better customer service than Time Warner Cable’s — not a high bar, given how TWC does in customer satisfaction surveys.
▪ Charter has simpler offers without a lot of hidden fees.
▪ Charter says TWC customers will get superior products, from faster broadband to expanded video offerings to additional high-definition channels. Charter’s slowest Internet speed, 60 megabits per second, costs $40 a month when bought by itself. Time Warner Cable advertises 30 megabits for $55 a month.