By Amol Sharma
Charter Communications Inc. is nearing an acquisition of Time
Warner Cable Inc. in a roughly $55 billion deal that would vault
the cable operator to the ranks of the biggest U.S. broadband and
pay-television companies, creating a more potent rival for the
likes of Comcast Corp. and DirecTV.
The companies are in advanced talks for a cash-and-stock deal
that would value Time Warner Cable at $195 a share, according to a
person familiar with the matter. Time Warner Cable shareholders can
choose $100 a share in cash and the rest in Charter stock, or $115
in cash and the remainder in stock, a person said.
As part of the transaction, which could be announced as early as
Tuesday, Charter also would merge with small operator Bright House
Networks. The combined cable giant would have 23 million total
customers, second only to Comcast's 27 million among cable
operators.
News of the advanced deal talks comes only a month after Time
Warner Cable went back on the block when Comcast terminated the
companies' planned merger in the face of serious pushback from
Washington regulators. A Charter-TWC deal could be in for a
stringent review in Washington as well, some analysts have said.
The acquisition carries a breakup fee of about $2 billion, a person
familiar with the matter said, while Comcast's deal with Time
Warner Cable had no breakup fee.
For Charter, which has 5.9 million residential subscribers in
more than 25 states and is backed by cable pioneer John Malone's
Liberty Broadband Corp., a union with Time Warner Cable would be
the culmination of two years of efforts to become a bigger U.S.
cable player and a catalyst for industry consolidation. Liberty
will help fund the deal by buying $5 billion of new Charter shares,
and Mr. Malone's stake in the combined entity will fall below 25%,
a person familiar with the matter said.
Charter and Mr. Malone are betting that increased scale will
help the company navigate the industry's choppy waters. Operators
must contend with the onset of cable "cord-cutting" as frustrated
consumers drop connections, the rise of streaming video competitors
from Netflix Inc. to Apple Inc., and expected fights with TV
channel owners over which networks are worth keeping in the bundle,
and the reality of broadband regulations under new "net neutrality"
rules.
In 2013, Charter made multiple offers to buy Time Warner Cable
but was rebuffed. Its efforts culminated in a hostile bid early
last year that was headed off when Comcast struck its ill-fated TWC
deal.
This time, Charter took a more light-handed approach. Mr. Malone
got more involved, people familiar with the matter say, calling
Time Warner Cable Chief Executive Rob Marcus in the early stages of
Charter's pursuit to indicate he wanted a friendly deal. Charter's
camp made a point of not submitting a lowball bid that would put
off Time Warner Cable, the people said.
The price tag of $195 a share this time around represents a 14%
premium to Time Warner Cable's closing price of $171.18 on Friday.
Last year, Charter had proposed a takeover at $132.50 a share in
cash and stock, only to be bested by Comcast's all-stock bid of
just under $160 a share.
Still, competition threatened to once again derail the plans of
Charter and Mr. Malone: European telecommunications group Altice
SA, backed by French cable baron Patrick Drahi, was in hot pursuit
of Time Warner Cable in recent days. Mr. Drahi met with Mr. Marcus
on May 20 to discuss a potential cash-and-stock deal, The Wall
Street Journal reported.
Now that a deal has been struck with Charter, Altice doesn't
plan to submit a higher offer, according to people familiar with
the matter.
For Altice, a deal the size of TWC would have been a bold move
just days after the company surprised investors with its purchase
of a 70% stake in U.S. midsize cable operator Suddenlink in a deal
valued at $9.1 billion.
Still, Mr. Malone could face more competition in the industry
from Mr. Drahi in the future. Mr. Drahi--for whom Mr. Malone has
served as a model in his expansion of Altice--has ambitions to grow
further in the U.S. Last week, Altice Chief Executive Dexter Goei
told investors that the group wants to participate in any
consolidation of the U.S. cable and telecom market.
Bloomberg earlier reported that Charter was nearing a deal for
Time Warner Cable and Bright House.
For Time Warner Cable, the pact with Charter continues a wild
ride over the past two years. The company was struggling last year
with video subscriber losses and other problems, when Comcast's
$45.2 billion buyout provided what looked like a good exit for
shareholders. Then the surprising turn of events in Washington left
the company in a lurch--only to result in what looks like another
deal in short order.
The backlash to Comcast's bid for Time Warner Cable at the
Federal Communications Commission and Justice Department left many
cable executives and investors wondering whether any
transformational cable industry deal could withstand regulatory
review. FCC Chairman Tom Wheeler called cable executives including
Time Warner Cable's Mr. Marcus and Charter CEO Tom Rutledge in
recent days to convey that they shouldn't assume the agency is
against any and all future deals just because of what happened with
Comcast's.
Cable companies typically don't overlap geographically and
therefore don't compete head-to-head for broadband and cable
customers. But in reviewing the Comcast deal, regulators were
concerned about the implications of a company having too much
control in the broadband market.
A combined Comcast-TWC would have served about 35 million
residential and business Internet customers. It would have had at
least 57% of the market for broadband Internet service, defined by
the FCC as speeds 25 megabits-per-second and higher. A
Charter-TWC-Bright House combination would serve nearly 20 million
residential and business Internet customers.
The new Charter-TWC entity would have only about 24% of the
broadband market, which shouldn't be an issue for regulators,
according to Jonathan Chaplin, an analyst at New Street
Research.
"This deal will not be blocked," he said. "The reason
Comcast-Time Warner Cable was a problem for the government was
because they were going to have a dominant share of the national
broadband market. The concern was they would use their market power
in broadband to submerge the development of the over-the-top video
market."
To be successful in the coming years, cable operators will need
to lean heavily on their broadband businesses to generate profit
growth while limiting shrinkage in their TV business. That means
investing in broadband infrastructure, streaming video services and
other technologies.
Together, Charter and Time Warner Cable would have the benefits
of scale to invest in new technologies. Larger pay TV companies are
also in a better position to push back against programmers' price
increases.
Still, a combined Charter and Time Warner Cable would be playing
catch up to Comcast, which has invested large sums already in
rolling out new set-top box technology and other enhancements meant
to bring some of the ease-of-use and binge-viewing capabilities of
the Web to TV.
"Having a counter-weight to Comcast in the industry is a good
thing," Mr. Chaplin said.
For Mr. Malone, the deal would mark his return as a force to be
reckoned with in U.S. cable, putting him in position to influence
how the industry transitions into a media world dominated by
streaming video and broadband.
The 74-year-old was a formative figure in the early days of the
cable industry. He took over debt-ridden Tele-Communications Inc.
in his early 30s, guiding it through a period of uncertainty and
through hundreds of acquisitions in the 1970s and 1980s that made
it the largest U.S. cable TV operator. In 1998, he sold TCI at its
height for $48 billion to AT&T. (AT&T later sold its cable
assets to Comcast.)
The cable-TV market that Mr. Malone and others raced to build at
a breakneck pace is now fully mature--and has actually begun to
contract. Consumers frustrated by rising cable-TV prices are
dropping service in favor of relatively inexpensive streaming video
services.
To be successful in the coming years, cable operators will need
to lean heavily on their broadband businesses to generate profit
growth while limiting shrinkage in their TV business. That means
investing in broadband infrastructure, streaming video services and
other technologies.
Together, Charter and Time Warner Cable would have the benefits
of scale to invest in new technologies. Larger pay-TV companies are
also in a better position to push back against programmers' price
increases.
Still, a combined Charter and Time Warner Cable would be playing
catch-up to Comcast, which has invested large sums already in
rolling out new set-top box technology and other enhancements meant
to bring some of the ease-of-use and binge-viewing capabilities of
the Web to TV. In addition, cable merger integrations can be messy,
due to different technologies used by operators, which could also
prove a challenge.
Charter would be entering competitive big-city markets where TWC
operates, including New York, where TV and ultrafast broadband from
Verizon Communications Inc.'s FiOS provides stiff competition.
Shalini Ramachandran contributed to this article.
Write to Amol Sharma at amol.sharma@wsj.com
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