Charter Communications Inc. (CHTR) is nearing a deal to acquire about 1.5 million subscribers from Comcast Corp. (CMCSA) and an equity stake in a newly formed company with another 2.5 million customers, people familiar with the situation said.
Charter will own about a 40 percent stake in the newly formed company, according to two of the people, who asked not to be identified discussing private information. Comcast has already said it plans to divest about 3 million subscribers as part of its $45.2 billion acquisition of Time Warner Cable Inc. (TWC), and the agreement is contingent on that deal closing.
Reaching a deal with Charter before regulators weigh in on the Time Warner Cable deal would appease critics, such as Minnesota Senator Al Franken, who say Comcast will be too large and have too much power. Charter and its billionaire backer John Malone would also save face by striking a deal with Comcast after the two companies originally attempted to work together to carve up Time Warner Cable earlier this year.
“When John Malone set out on his quest to consolidate the U.S. cable business, I don’t think this was the end game he imagined,” said Paul Sweeney, an analyst at Bloomberg Industries. “Nevertheless, this deal looks like the best he could do under the circumstances.”
Charter will pay about $20 billion for the subscribers and the equity stake in the new company, the people said. Comcast was seeking about $18 billion for the 3 million subscribers it had planned to sell, a person with knowledge of the matter had said. An agreement may be announced as soon as this week, although talks could still fall apart, two of the people said.
Though it wouldn’t own a majority of the new company, Charter would have influence over its management and could negotiate future programming deals in conjunction with the company, one person said. With 2.5 million subscribers, the new venture would be the fifth-largest cable company in the U.S.
Charter would become the second-largest U.S. cable provider by subscribers after adding 1.5 million to its current 4.2 million base, behind Comcast, if the Time Warner Cable deal is approved. Cox Communications Inc. is the third largest.
Charter couldn’t acquire the new company immediately, though it will also be difficult for other companies to buy it without Charter’s blessing, one person said. The new company will be publicly traded.
Charter and Comcast will also swap cable assets so that each can build a bigger position in certain regions, said the people. This includes Charter swapping its 275,000 Los Angeles subscribers to Comcast, who would take over control of the city after acquiring about 1.8 million Time Warner Cable customers in the region, the people said.
John Demming, a spokesman for Comcast, declined to comment, as did Justin Venech at Charter. Parts of the agreement were first reported by the Wall Street Journal.
Malone, who controls Charter’s largest investor Liberty Media, has said he wants the cable company to be a “horizontal acquisition machine,” buying up many cable assets to increase the scale of the operator.
Comcast and Charter’s talks to split up Time Warner Cable broke down after weeks of negotiation earlier this year, pushing Comcast to agree to a deal for about $159 a share for Time Warner Cable without Charter’s involvement. Time Warner Cable rose 1.3 percent to $138.43 in New York yesterday, 13 percent lower than Comcast’s offer price.
Comcast, the largest U.S. cable company, topped analysts’ earnings estimates yesterday by adding video subscribers for the second straight quarter. The Philadelphia-based company has about 22 million customers and would add 8.3 million more after the divestitures if the deals go through.
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