By Shalini Ramachandran
Charter Communications Inc. could acquire nearly four million
extra subscribers in a two-stage deal under discussion with Comcast
Corp., in what would represent a consolation prize for Charter's
nearly yearlong pursuit of Time Warner Cable Inc.
News of the talks came as Comcast reported on Tuesday that its
first-quarter profit grew 30%, as it continued to add video
subscribers and saw strong growth in its NBCUniversal entertainment
arm, thanks to the Winter Olympics.
Charter and Comcast are in advanced talks on a complex deal that
would be contingent on Comcast's completion of its proposed $45
billion takeover of TWC. As part of that acquisition, which would
add TWC's 11 million subscribers to Comcast's roughly 22 million
existing subscribers, Comcast had said it would divest three
million subscribers so its share of the pay-TV market wouldn't rise
above 30%.
In the first part of the deal now being discussed, Charter would
likely acquire between 1 million and 1.5 million subscribers
through a straight out sale, said people familiar with the
situation. Separately, Comcast plans to spin off a company holding
a few million more subscribers. Under the plan, Charter would take
an equity stake in that company and could buy the entity over time,
the people said.
If that happened, Charter would end up with nearly four million
in additional subscribers, nearly doubling its size to around eight
million video customers. That would make it the second-largest
cable operator, helping advance the growth strategy set out by
Charter and its biggest shareholder, Liberty Media Corp., to
consolidate the fragmented cable industry.
For Charter, the total cost is likely to be more than the $18
billion Comcast had said it hoped to receive for the sale of three
million subscribers.
The deal under discussion would also involve system swaps
affecting nearly one million other subscribers, the people said.
Such swaps could help both Comcast and Charter boost their presence
in key markets.
The deal isn't yet finalized, however, and could still fall
apart, one of the people said. In February, Comcast and Charter had
been close to allying on a Charter-led bid for Time Warner Cable,
but those talks fell apart.
Still, a deal with Charter could help Comcast in its efforts to
persuade regulators in Washington to approve the TWC acquisition,
by showing it has a concrete plan to meet its divestiture promises.
On Monday Netflix Inc. came out against the deal, citing concerns
about the combined company's position in the broadband market.
Comcast has said the combination won't change the competitive
landscape for consumers in pay television or broadband, because its
operations don't overlap with those of TWC's.
Comcast reported a first-quarter profit of $1.87 billion, or 71
cents a share, up from $1.44 billion, or 54 cents a share, a year
earlier. Excluding gains on sales and acquisition-related items,
adjusted per-share earnings rose to 68 cents from 51 cents. Revenue
increased 14% to $17.41 billion, although excluding the effect of
the Winter Olympics it rose 6.5% to $16.3 billion.
In the quarter, Comcast added 24,000 video customers, compared
with a loss of customers a year earlier, although part of the
increase was due to a change in how Comcast counts its subscribers.
In the previous quarter, Comcast grew its video subscriber base for
the first time after 26 straight quarters of decline.
The cable operator has earned plaudits from analysts and
investors for its strong performance. In recent years most cable
operators have been losing video subscribers to phone companies and
satellite-TV companies.
Vijay Jayant, an analyst at ISI Group LLC, has said in research
notes that the recent improvement in Comcast's video-subscriber
trends came after a "heavy promotional period" in the fourth
quarter, as well as a focus on discounted TV bundles targeted at
younger consumers in the first quarter. He said the strategy will
give subscriber sign-ups momentum but "may put pressure" on
revenue.
Comcast's video revenue grew only 1.3% in the quarter, a smaller
growth from some previous quarters, due in part to the company
levying a smaller rate increase in the quarter than it did last
year.
Meanwhile, subscriber growth in broadband and voice slowed.
Comcast added 383,000 broadband subscribers compared with 433,000 a
year ago.
At Comcast's NBCUniversal, operating cash flow jumped 38% to
$1.3 billion, helped by the Winter Olympics. The broadcast TV
segment, home of the flagship NBC network, reported revenue growth
of 17% even excluding the effect of the Olympics, helped by strong
prime-time ratings and late night.
On the conference call with analysts Tuesday, Comcast Chief
Executive Brian Roberts said NBC is "positioned to end the full
season as the No. 1 network in the coveted 18-49 category" for
prime-time and late night.
Cable networks' operating cash flow grew 4.2% to $895 million.
The theme-parks division, meanwhile, posted a decline of 1.5% in
operating cash flow. Excluding the effect of the Olympics, total
revenue at NBCUniversal rose 8%.
Write to Shalini Ramachandran at
shalini.ramachandran@wsj.com
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