Charter Closes Time Warner Cable, Bright House Deals to Become Pay TV Powerhouse

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Charter CEO Tom Rutledge

The combination of the three giant cable companies transforms Charter into the second-biggest provider behind Comcast, with president and CEO Tom Rutledge also adding the chairman title.

Charter Communications on Wednesday closed its $55 billion acquisition of Time Warner Cable and its $10.4 billion takeover of Bright House in a mega-transaction that rearranges the U.S. pay-TV landscape.

The newly merged company instantly becomes the second-biggest cable provider, after Comcast, and observers predict it could chip away at the bargaining power of content creators.

"We have already seen one example from the merger of DirecTV and AT&T whereby affiliate fees are adjusted to the lower end of the merged companies," notes Steven Birenberg of Northlake Capital Management. "There is a shift of power in favor of the distributors due to their enhanced scale."

Charter, in which John Malone’s Liberty Broadband owns a big stake, is run by president-CEO Tom Rutledge, who is now also adding the chairman title after the completion of the two acquisitions. It has been the No. 3 cable operator in the U.S. with TWC second and Bright House No. 6. While the entity will be the second-biggest cabler, it's still a close third TV operator behind AT&T/DirecTV.

The merged company will command about 17 percent of the nation's pay TV subscribers, or 17 million, and 22 percent of the broadband subscribers, or 19 million, with particularly strong positions in New York and Los Angeles. "The combination of Charter, TWC and Bright House will create a leading broadband services and technology company, serving over 25 million customers in 41 states," the company said.

The deal makes Malone a big cable industry player worldwide, as his Liberty Global already owns cable assets across Europe and in parts of Latin America.

"Current Bright House Networks and Time Warner Cable customers won't see many changes right away, though in the coming months they will begin to hear more from us about the [Charter's] Spectrum brand [which it will bring to the acquired systems], and the product improvements and consumer friendly policies that come with it," said Rutledge. Digital infrastructure upgrades in the acquired systems are also a focus. "Charter's objective is to provide high-quality products at great prices, and back it up with excellent customer service, and we intend to continually improve the way we do business in order to be the very best at what we do," said the exec.

While Charter has not identified carriage fees as a key source of savings, it's impossible to ignore that the larger company is better positioned to keep a lid on price increases. Negotiations have been particularly contentious lately, with some providers dumping various channels owned by Time Warner and Viacom, for example.

“It will give them more leverage to negotiate deals, including most-favored nation clauses, better pricing and conditions and over-the-top rights,” said Macquarie Securities analyst Amy Yong. “This could push the cable industry to innovate faster around streaming services and leverage set-top box data.”

Some of the conditions of the merger, in fact, were designed by the FCC to protect the OTT services and their customers from price hikes. During an investor conference Tuesday, Rutledge spoke of Hulu's plan to include some live TV with its traditional offering of VOD, and the odd possibility that consumers could dump their TV service to get their video from a competitor but still delivered via Comcast Internet.

"It would be different," he acknowledged. Rutledge said Comcast sends $9 billion a year to content providers and another $4.5 billion in ad revenue to them. "All that would sort of crumble," he said, adding though that so-called skinny bundles aren't all they're cracked up to be.

"it's still not easy to put small packages together that are compelling, and it's not in the interest of big programmers to let that happen," Rutledge said Tuesday.

Drexel Hamilton analyst Tony Wible agrees that, given weaker TV ratings practically across the board at cable channels, the pay TV distributors are enjoying more leverage nowadays. “But every TV network is different, and if you have broadcast, sports or HBO you are in good shape,” he said.

Among other things, Charter agreed not to set content licensing terms with programming suppliers that would limit the latter's ability to license content to online providers. "This administration appears to want to ensure SVOD services like Netflix have an unfettered ability to license popular content," said FBR Capital's Barton Crockett.

Analysts cite new carriage deals with the likes of Walt Disney, Time Warner, 21st Century Fox and CBS Corp. that Charter will have to negotiate over the near- to mid-term, and Wall Street and Hollywood will keep a close eye on how they shape up.

Charter's closing of the two acquisitions comes at a time when Wall Street is feeling better about pay TV distributors than it is about most content creators. This year, for example, shares of Charter are up 28 percent since a near-term bottom in the stock market in mid-February, better than Viacom, CBS, 21st Century Fox, Time Warner, Disney and most other entertainment companies.

“Our sense is that sentiment continues to shift away from media into distribution,” Wells Fargo analyst Marci Ryvicker.

Why do investors feel so positive about pay TV companies? “Maybe it's because every single one of our cable/satellite companies managed to beat [earnings estimates] nicely this first quarter,” she offered. “Or maybe it's driven by a fear that the strength in the ad market may end sooner than we once thought.”

Most big entertainment companies didn’t voice a strong position against the Charter-TWC deal, but at the invitation of the FCC, representatives from Time Warner and its HBO unit met with FCC officials and raised concerns that the enlarged company could feel inclined to take actions “directed at programmers in response to the development of” online video services, such as HBO Now.

Discovery Communications CEO David Zaslav said “consolidation is always a challenge, and when the distributors get bigger, it presents some issues.” But he also said that Charter’s support for TV Everywhere was a positive.

Some critics expressed concern that Malone, also the biggest shareholder in Discovery, could keep Discovery from other pay TV operators. But Discovery in an FCC filing said doing so would cause “economic harm” and that Charter and Discovery have remained “structurally and operationally independent of each other.”

Charter's new board will be led by Rutledge as chairman, while Eric Zinterhofer, who has been serving as chair since 2009, will continue to be a board member. Advance/Newhouse has designated Steve Miron and Michael Newhouse to serve on Charter's board, while Liberty Broadband will continue to be represented on the board by Malone, CEO Greg Maffei and Liberty Global chief tenchology officer Balan Nair. Continuing as members of the board are Lance Conn, Craig Jacobson, Jay Markley and David Merritt, while the company added Mauricio Ramos, CEO of Millicom. The remaining open position on the board is expected to be filled soon.

"The newly acquired systems "are in better shape than we’d even planned for," Rutledge recently touted in a reference to TWC's recent subscriber growth momentum, among other things. Charter has been focusing on adjusting to changing consumer needs and usage, which will be a continuing focus for the enlarged company.

With cord-cutting estimated at 1 percent annually and skinny bundles being hyped, change is coming, but Rutledge said Tuesday that it won't happen fast.

"If you look down the road two years from now and look at how programming is sold and packaged, it will look more like it is now than it will be different," he said.