Comcast to Sell Customers, Easing Time Warner Deal Path

Charter Communications Inc. reached an agreement to take control of 3.9 million more cable-TV customers, helping Comcast Corp. ease the approval process for its merger with Time Warner Cable Inc.

In the first step of today’s three-part agreement, Charter said it will buy 1.4 million Time Warner Cable customers for $7.3 billion after the merger of Comcast and Time Warner Cable closes. Charter will also form a holding company to acquire a 33 percent stake in a spinoff from Comcast that will pick up 2.5 million Comcast customers. The companies will also swap 1.6 million customers apiece.

The arrangement could help Philadelphia-based Comcast appease critics of the $45 billion takeover of Time Warner Cable by reducing the combined company’s market share to less than 30 percent. After Comcast thwarted Charter’s earlier attempt to acquire Time Warner Cable, Charter is also saving face with today’s transaction that will make it the second-largest U.S. cable operator. Charter shares rose the most in more than a year.

“Despite what may be some lingering bad blood between Comcast and Charter, this deal illustrates that these companies can work well together to efficiently consolidate the cable-TV industry,” said Paul Sweeney, an analyst for Bloomberg Industries.

Charter shares climbed 7.7 percent to $140.05 today, the highest closing price since the company emerged from Chapter 11 bankruptcy protection in 2009. Comcast rose 1.4 percent to $51.70.

Spinoff Valuation

Shareholders of Comcast and the former Time Warner Cable will own 67 percent of the new spinoff, while Stamford, Connecticut-based Charter will manage the entity. The spinoff is estimated to have an enterprise value of $14.3 billion and an equity value of $5.8 billion, according to slides disclosed in a regulatory filing.

The transactions may give Comcast $10 billion to spend on share buybacks, estimated Adam Ilkowitz, an analyst with Nomura Holdings Inc., in a note today.

Comcast is touting the deal with Charter as a proactive concession to regulators who are reviewing its Time Warner Cable acquisition. Critics, including Minnesota Senator Al Franken, have said that Comcast will be too large, have too much power and try to raise prices for consumers.

“This transaction today gives federal, state, and local regulatory bodies early identification of our divestiture process, which we believe should be helpful in our efforts to gain approval for our merger with Time Warner Cable,” Brian Roberts, Comcast’s chief executive officer, said on a conference call today.

‘Unprecedented’ Power

“Today’s move should be a small but welcome gesture to regulators,” Paul Gallant, Washington-based managing director for Guggenheim Securities, said in a note today.

While Comcast has told lawmakers that size will help the company improve its technology and services, public-interest groups have said it will give Comcast “unprecedented” power to stifle competition and increase costs.

“This convoluted transaction may change the final tally of subscribers under the proposed merger, but it can’t change the fact that this deal is a big loss for innovation and competition,” Matt Wood, policy director for advocacy group Free Press, said in an e-mailed statement. “Transforming three giant companies into two behemoths gives no comfort to content providers or consumers. Lawmakers and antitrust authorities shouldn’t be fooled either.”

Vocal Critic

Time Warner Cable also noted the benefits of today’s deal for the larger takeover process.

“This morning’s announcement is a win-win-win and moves us one step closer to completing our merger with Comcast,” Time Warner Cable said in an e-mailed statement.

It also potentially assuages a vocal critic of the Time Warner Cable takeover: Charter itself. Charter, as recently as a month ago, had urged Time Warner Cable investors not to endorse Comcast’s proposal. Last week, Charter withdrew its plan to nominate an alternate board slate for Time Warner Cable, according to a filing today.

In Charter’s new deal with Comcast, there’s a standstill in which Charter has agreed not to acquire any shares of the spinoff for two years and not to acquire shares that would cause it to own more than 49 percent of the spinoff for two years after that, said Alex Dudley, a spokesman for Charter.

Charter will likely buy the rest of the spinoff after the four-year period, and can do other deals in the meantime, Craig Moffett, founder of research firm MoffettNathanson LLC, said in a note today.

‘Greater Scale’

A new publicly traded company will own all of Charter and 33 percent of the spinoff company. Charter will issue about $2.1 billion in equity to shareholders of the new spinoff.

“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,” Charter CEO Tom Rutledge said in today’s statement.

Charter’s new footprint will be easier to operate and have faster growth, Rutledge said on a conference call today to discuss the deal. The company will now have about 5.7 million subscribers plus the management of another 2.5 million through the spinoff company, helping it oversee a total of 8.2 million video customers. That’s almost double its previous reach.

Swapping Markets

With the asset swap, Charter will gain systems in Ohio, Kentucky, Wisconsin, Indiana and Alabama, while divesting systems in California, New England, Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia. The spun-off company will own systems that are near Charter’s existing footprint in Michigan, Minnesota, Indiana, Alabama, Tennessee, Kentucky and Wisconsin.

“What we like about the deal is at the end of the day Charter spends less than $20 billion to double its subscribers while also dramatically improving the operational efficiencies” by clustering Charter subscribers in the same geographic areas, Richard Tullo, an analyst with Albert Fried & Co., wrote in a note today.

Charter CEO Rutledge will be chairman of the new spinoff, which will have 9 board members, 3 of whom will be Charter executives.

Pay-TV’s Decline

Today’s agreement marks the end of weeks of discussions between Charter and Comcast and puts them both on a path to reaching more subscribers after the traditional U.S. pay-TV market lost customers for the first time last year. Rutledge has envisioned expanding through acquisitions to help the cable company negotiate for better deals on programming and boost profit.

Charter also said today that it captured more TV customers on its own in the first quarter, according to a separate statement. Residential video customers rose by 18,000, beating the 5,000 additional TV subscribers projected by Philip Cusick, an analyst at JPMorgan Chase & Co.

Charter’s net loss narrowed to $37 million in the first quarter, or 35 cents a share, from $42 million, or 42 cents, a year ago. Sales rose to $2.2 billion, compared with the $2.18 billion analysts predicted on average.