John Malone Illo
Joel Kimmel

Charter Communications is poised to become the nation’s second-largest cable operator after reaching an agreement that calls for Comcast to divest about 3.9 million video subscribers following its merger with Time Warner Cable.

The pricetag of the complex deal — which involves the creation of a publicly traded entity to house 2.5 million existing Comcast subs in addition to Charter’s direct acquisition of 1.4 million existing TW Cable subscribers — has been pegged at about $22 billion. Execs said the deal worked out to an acquisition cost of about 7.2 times EBITDA.

Charter will pay an estimated $7.3 billion in cash for the 1.4 million ex-TW Cable subs. Comcast and Charter will also swap assets amounting to 1.6 million subscribers. Both sides aim to horse trade subs with the goal of strengthening their key  geographical clusters with swaps are a better fit with existing assets. Comcast’s swaps will involve only former TW Cable subscribers.

In the end, Charter will beef up its holdings in key Southern and Midwstern states, while Comcast will add to its heft across New York state, Southern and Northern California as well as Boston, Atlanta and parts of North Carolina.

Charter Communications, backed by John Malone’s Liberty Media, vied with Comcast in the chase to acquire TW Cable before Comcast sealed its $45 billion pact with TW Cable in February. As part of that deal, Comcast promised to divest a significant number of subscribers — and now Charter will leapfrog ahead of Cox Cable on the list of the nation’s largest cable operators.

But just as the Comcast-TW Cable has drawn fierce opposition from many quarters, Monday’s announcement of the divestiture plan spurred complaints among media watchdog groups and industry orgs concerned about the broader impact of consolidation.

“Today’s announcement from Comcast would, in essence, lead to the creation of a three-company cable cartel. Masquerading as subscriber divestitures, the agreement with Charter brings together the three largest cable providers, who account for 38% of cable subscribers and 45% of Internet subscribers,” the Writers Guild of America West said in a statement. “The decision of these three powerful companies to divide markets and share ownership of subscribers through a new publicly traded corporation is unprecedented and adds to the mounting evidence against the Comcast-Time Warner Cable merger.”

Even with a growth spurt to 8.2 million subscribers serviced, Charter will remain a distant No. 2 to Comcast, which is projected to have about 30 million subs following its merger. Charter will manage the 2.5 million subscribers owned by the publicly held entity, dubbed “SpinCo” for the purposes of Monday’s announcement. Comcast will have no ownership stake in that company once all the divesting deals are completed. Charter will own 33% of SpinCo, with Charter chief Tom Rutledge serving as non-executive chairman of its nine-member board.

“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-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. We look forward to working with the management teams at Time Warner Cable, Charter and the new entity to close these transactions and ensure a smooth transition for the customers and employees of all companies.”

Charter CEO Tom Rutledge emphasized the deal’s benefits for Charter, which was left smarting by Comcast’s stealth move to scoop up TW Cable after months of discussions about the Comcast joining Charter in a joint bid for what had been the second-largest cable operator.

“Charter’s new customers will benefit from our philosophy of 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,” said Tom Rutledge, prexy-CEO of Charter. “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.”

During a conference call, Rutledge emphasized the focus on gaining a larger footprint and enhanced scale in key Charter geographic clusters in the South and Midwest by focusing on adding subs in Ohio, Wisconsin, Kentucky, Michigan, Minnesota, Tennessee, Alabama and Indiana, among other states.

Comcast will strengthen its position in New York state, the greater Boston area, Dallas-Fort Worth, Northern and Southern California, Atlanta and North Carolina.

Rutledge called the deal “transformational” for Charter. Comcast execs noted that the deal plan outlined should give local, state and federal regulators assurance that they will follow through on its promise to divest enough subs following its TW Cable union to stay just under the threshold of 30% of total MVPD subscribers in the U.S.

And both camps touted the benefits of the “geographic realignment” allowed by the deal, giving both sides the chance to bulk up in markets where they already have heft.

“Larger regional footprints (are) helpful. It makes the products more competitive and opens up new markets,” Roberts said.

Rutledge pitched the deal to analysts as “a good outcome for the industry at large and (Charter) shareholders generally.”

 

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