Aug. 2 (Bloomberg) -- Cox Communications Inc., the third-largest U.S. cable provider, has held talks about combining with Charter Communications Inc., according to two people with knowledge of the matter.
Cox President Pat Esser has discussed a deal with representatives from Liberty Media Corp., which owns a 27 percent stake in Charter, said one of the people, who asked not to be identified because the negotiations are private. The structure of a potential deal hasn’t been determined, including which company might be the acquirer, the other person said. Cox and Charter also haven’t begun direct talks, the people said.
Liberty and Charter are also still pursuing an acquisition of Time Warner Cable Inc., the people said. Billionaire John Malone, who controls Englewood, Colorado-based Liberty, has said he wants Charter to get bigger so it can gain leverage in negotiations with TV networks, which have sought higher prices for the use of their programming.
Charter, the fourth-largest U.S. cable company by subscribers, jumped 4.7 percent to $134 at the close in New York, the most in more than a month, after Bloomberg reported on the Cox talks.
Cox has 4.8 million video subscribers, while Charter has 4.4 million, according to Craig Moffett, an analyst at Moffett Research LLC in New York.
“A Cox deal, if available, makes a ton of sense for Charter,” Moffett said today in a research note. “Nosebleed leverage wouldn’t be necessary; a merger of equals would leave balance sheet room for subsequent deals, while still giving Charter the benefit of a doubling of scale.”
Todd Smith, a spokesman for Atlanta-based Cox, declined to comment. Courtnee Ulrich, a spokeswoman for Liberty, didn’t return phone and e-mail messages.
Malone sees mergers as an appealing way for the cable industry to cope with the lower video profit margins that have come from higher programming costs and fewer new customers, he said at Liberty Media’s annual meeting in June.
“The whole name of the game in the cable business is scale,” he said then. Charter has the opportunity to be a “horizontal acquisition machine, looking at other assets in the U.S. cable business that lack scale to have synergy,” he said.
Malone’s strategy isn’t just about traditional cable. The high-speed Internet connections that companies like Charter provide to U.S. households are the key to the future of the TV industry, Malone said at the June meeting. He cited the growing viewership of streaming-video services, also known as over-the-top.
“Everyone recognizes that high-speed connectivity will be the controlling attribute that drives market share in the video business,” he said. “As more and more content is available over-the-top, the ability to provide flexible high-speed connectivity I think will become a dominant trait.”
A potential change in the ownership structure of Cox Enterprises Inc., owner of Cox Communications, may make a deal more likely. James Cox Kennedy, chairman of closely held Cox Enterprises, asked a judge earlier this week to dissolve a 1941 trust for Anne Cox Chambers, his billionaire aunt and the company’s biggest shareholder, to free the money for relatives and charities.
Dissolving the trust is a step toward Cox gaining flexibility to merge the cable company, one of the people said.
Cox would serve as another option for Charter if Time Warner Cable, which has been resistant to a combination, refuses to agree to a deal, said the people.
Liberty Media rose 2.6 percent to $147.84 at the close in New York. Time Warner Cable fell 0.5 percent to $117.10.
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