Charter Communications is expected to announce on Tuesday that the company has reached an agreement to purchase Time Warner Cable. If the deal passes regulatory scrutiny, the third and second largest cable providers, respectively, will provide heavy competition to industry leader Comcast, as well as other companies like DirecTV and Netflix. The estimated $55 billion sale comes after Comcast pulled out of a $45.2 billion deal to buy Time Warner amid antitrust concerns the potential behemoth faced from regulators. Unlike the Comcast deal, the Charter agreement also requires the company to pay Time Warner a $2 billion “break-up” fee should the deal fall through. Charter, heavily funded by billionaire media pioneer John C. Malone, has indicated over the past two years that the company strongly desires to become one of the top players in the ever-shrinking roster of cable providers. As Charter’s leading shareholder, his Liberty Broadband Corp. is purchasing an additional $5 billion in Charter shares to help fund the purchase. Malone will own a 25 percent stake in the new company.
The agreement indicates a change in tone for both companies. Charter had tried multiple times in 2013 to acquire Time Warner only to be rebuffed. Then in 2014, Charter nearly pulled off a hostile takeover until Comcast intervened with its ill-fated purchase attempt. Led by Malone, however, the company pursued this agreement in a much friendlier manner. Charter is purchasing Time Warner shares at $195 in cash and stock, a 14 percent premium over the company’s Friday market closing price. Charter’s bid during last year’s attempt was only $132.50, and much higher than Comcast’s bid at nearly $160 per share. Unlike the Comcast bid, Wunderlich analyst Matthew Harrigan says that the deal has “a very high likelihood of passing muster with regulators” due to the merger’s smaller market share. Combined, the company would have an estimated 23 million subscribers, second only to Comcast’s 27 million. Also, NewStreet Research analyst Jonathan Chaplin notes that the Charter deal would only account for 24 percent of the broadband market, as opposed to over 40 percent in the Comcast deal, which alarmed regulators. Also, Federal Communications Commission Chairman, Tom Wheeler, recently called the CEO’s of both Charter and Time Warner to tell them he wasn’t opposed to future deals just because of the Comcast fallout.
The impending deal continues a wave of consolidations within the industry as it faces an increasing threat from satellite providers DirecTV and Dish, and ever-growing options in streaming services, led by NetFlix and Amazon. Charter already faces a tough new cable competitor even before the deal is officially announced as European cable giant, Altice, backed by French media mogul and Malone emulator Patrick Drahi, completed a $9.1 billion cash and debt purchase of Suddenlink, the 11th largest cable provider. Also, company executives told investors last week that Altice intends to be a player in the consolidation of the U.S. cable market. To help Charter’s expansion, the company is also in negotiations to purchase Bright House Networks, the U.S.’s 6th largest provider. Bright House would have been purchased by Comcast contingent on the Time Warner agreement. The new company’s combined clout will be highly valued as Charter, like the rest of the remaining cable providers, will likely need to invest in new technology and diversification of services in order to stay viable as the industry continues its war of attrition.
New York Times – Michael J. de la Merced
Reuters – Liana B. Baker and Greg Roumeliotis
Wall Street Journal – Amol Sharma