Charter to Become Second-Largest U.S. Cable Operator in Deal With Comcast
UPDATED: The company will acquire cable systems from the merged Comcast-Time Warner Cable to reach 5.7 million video subs and manage markets with an additional 2.5 million subs.
Charter Communications said Monday that it would become the second-largest U.S. cable operator in a multipart deal with Comcast after it completes its planned acquisition of Time Warner Cable.
The company will acquire cable systems from the combined company if a $45 billion deal for Comcast to take over Time Warner Cable is approved by regulators.
Charter is led by CEO Tom Rutledge. John Malone's Liberty Media owns a 27 percent stake in Charter. Malone has been urging cable industry consolidation, saying scale is key for sector players.
Charter’s pay TV subscriber base will increase by 1.4 million to a total of 5.7 million via the Comcast agreement. Adding in subscribers in markets that Charter will end up managing, it will reach 8.2 million video subscribers. Financial details weren't provided, but reports previously said that it could be worth $18 billion-$20 billion.
Comcast, which had previously said it would divest about 3 million subscribers following the Time Warner Cable deal, will remain the largest U.S. cable company with about 30 million subscribers, followed by Charter and Cox Communications, which as of last year had about 4.5 million video subscribers. Comcast ended the first quarter with about 22.6 million video customers, while Time Warner Cable reported 11.16 million.
The Comcast-Charter agreement calls for a series of tax-efficient transactions, in which the combined Comcast-Time Warner Cable will divest cable systems that will reduce its video subscriber count by approximately 3.9 million. The deal is in line with Comcast’s plans to reduce its post-merger managed subscriber total to less than 30 percent of total U.S. pay TV subscribers "while maintaining the compelling strategic and financial rationale" of the proposed Time Warner Cable deal, Comcast said.
Following the close of the Comcast-Time Warner Cable deal, Charter will acquire approximately 1.4 million existing subscribers in cash that are currently managed by Time Warner Cable. Charter and Comcast will also swap approximately 1.6 million customers to improve the geographic efficiency of their respective businesses.
In addition, Charter, through a tax-free reorganization, will form a new holding company, dubbed "New Charter, that will own 100 percent of Charter and acquire a 33 percent stake in a new publicly-traded cable provider, dubbed "SpinCo," to be spun off by Comcast to shareholders that will serve approximately 2.5 million customers. Charter will provide management services to this company.
SpinCo’s nine-member board will include six independent directors and three directors designated by Charter. Comcast will hold no ownership interest in SpinCo or Charter and will have no role in managing SpinCo.
During a conference call, Rutledge said that Charter will focus on markets in the Midwest and South-East after the deal since it will get cable systems in Ohio, Wisconsin, Kentucky and Alabama. Meanwhile, Comcast will pick up cable systems in such markets as California, New England, Texas and Virginia.
"In aggregate, today’s announced transactions will significantly enhance Charter’s scale and improve both companies’ geographic footprint, driving operational efficiencies for Comcast, Charter and SpinCo," Charter said.
Comcast reaffirmed Monday that it continues to expect its deal with Time Warner Cable to generate approximately $1.5 billion in operating efficiencies.
"Today’s agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable," said Comcast chairman and CEO Brian Roberts. "These transactions enable us to deliver meaningful value to our shareholders. The realignment of key cable markets achieved in these transactions will enable Comcast to fill in our footprint and deliver operational efficiencies and technology improvements."
Said Rutledge: "Charter’s new customers will benefit from our philosophyof providing highly valued products, featuring enhanced on-demand, interactive video and increased broadband speeds, all in a simplified package designed to provide better value and service. The transactions announced today will provide Charter with greater scale, growth opportunities and improved geographical rationalization of our cable systems, which in turn will drive value for shareholders and more effective customer service. And through our meaningful ownership in and board representation at SpinCo, we can help it achieve similar market share growth in the markets it serves."
Time Warner Cable said in a statement: "This morning's announcement is a win-win-win and moves us one step closer to completing our merger with Comcast. We're pleased that the parties have reached agreement and look forward to working with Comcast and Charter to make all of the transactions as seamless as possible for our employees and our customers."
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