Charter to Buy Time Warner for $55 Billion in Second Try

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Can Charter, Time Warner Cable Deal Get FCC Approval?

Charter Communications Inc. plans to buy Time Warner Cable Inc. for about $55 billion, clinching a deal made necessary by slowing growth in the U.S. cable industry -- and more expensive by last-minute competition from French billionaire Patrick Drahi.

Charter will pay $195.71 a share -- 14 percent above Time Warner Cable’s May 22 close -- with options of $100 and $115 in cash and the remainder in its own stock, according to a statement Tuesday. Bright House Networks, a smaller cable company that Charter had previously agreed to buy, will also be merged into the combined entity.

It took Charter and its main shareholder John Malone more than a year to reach a deal with No. 2 Time Warner Cable after their January 2014 bid of $132.50-a-share was rejected as a “low-ball offer” and Comcast Corp. jumped in with a competing proposal. Although Charter got another shot when regulatory scrutiny caused the Comcast deal to fall apart in April, talks were disrupted by Drahi’s Altice SA, which also approached Time Warner Cable in the past weeks.

“Time Warner Cable is the obvious winner here; their management team deserves kudos for having played their hand masterfully,” Craig Moffett, an analyst at MoffettNathanson, wrote in a note to investors. “That play-one-against-the-other tactic resulted in a huge premium.”

Including debt, the transaction values Time Warner Cable at $78.7 billion. The deal enables Charter to almost quadruple its number of cable subscribers, gaining customers in key cities including New York, Los Angeles and Dallas. The combined business will have about 17 million basic cable customers, second to Comcast’s 22 million. The bigger company could get more leverage when negotiating contracts with television networks, which in turn could keep cable TV prices down for consumers.

Time Warner Cable shares rose 7.3 percent to close at $183.60, 6.2 percent below the offer price, signaling possible concerns over regulatory approval. Charter gained 2.5 percent to close at $179.78.

Regulatory Hurdles

Charter Chief Executive Officer Tom Rutledge, who will head the combined company, said on a conference call that he is confident the deal would get approved.

FCC Chairman Tom Wheeler.

FCC Chairman Tom Wheeler.

Photographer: Michael Nagle/Bloomberg

The Charter-Time Warner Cable combination may have better chance with regulators than the collapsed Comcast-Time Warner Cable plan did. To dispel notions that cable mergers wouldn’t be approved by regulators, Federal Communications Commission Chairman Tom Wheeler last week called Rutledge and Time Warner CEO Rob Marcus, a person with knowledge of the calls has said. Wheeler told the CEOs that any transaction would be judged on merit, and there was no flat ban on cable combinations, the person said.

Wheeler repeated those comments Tuesday in a statement, saying “the commission will look to see how American consumers would benefit if the deal were to be approved.”

Higher Multiple

Time Warner Cable shareholders who choose to receive $100 in cash will get 0.5409 Charter share. They can also elect to receive $115 in cash plus 0.4562 Charter share, the companies said.

The transaction is expected to be completed by the end of 2015, provided it gets regulatory approval. The deal puts Time Warner Cable’s enterprise value at 9.5 times is earnings before taxes, interest, depreciation and amortization, based on 2015 estimates. That’s 23 percent higher than the average multiple of

7.7 for recent cable deals and 14 percent above Comcast’s proposed and abandoned bid, according to data compiled by Bloomberg.

Dealmaking has been heating up in an industry that faces waning demand for traditional pay-TV packages and competition from Netflix, Amazon and other online services. Although many analysts predicted a tie-up between Charter and Time Warner Cable, Drahi, a former protégé of Malone’s, made a surprise foray into the U.S. on May 20 with the announcement of plans to buy a smaller provider, Suddenlink Communications. While in the country, he also met with Time Warner Cable CEO Marcus, according to a person with knowledge of the matter.

Now with Charter’s tie-up with Time Warner Cable, Drahi plans to build his U.S. footprint by buying more small cable operators, according to people with knowledge of the matter. Altice could also pick up any assets that Time Warner Cable and Charter may sell to alleviate regulatory concerns, the people said, asking not to be identified as the discussions are private. Altice has said it ultimately aims to have the U.S. contribute to half of the company’s business.

Breakup Fee

Liberty Broadband Corp., the Malone company that holds the stake in Charter as well as shares of Time Warner Cable, will buy $5 billion of new Charter stock to help fund the deal.

The transaction has a breakup fee of $2 billion, which anticipates a possible bid by Drahi’s Altice and antitrust concerns, according to people familiar with the matter.

Charter also renegotiated its offer to buy billionaire Si Newhouse Jr.’s Bright House Networks for $10.4 billion. That agreement had been in jeopardy because it depended on Comcast closing its merger with Time Warner Cable, which has the right to match or block the deal because of a longstanding arrangement to negotiate programming and other deals for Bright House.

Charter was advised by Goldman Sachs Group Inc., LionTree Advisors and Guggenheim Securities. Bank of America Corp. and Credit Suisse Group AG also assisted Charter and provided financing along with Goldman Sachs and UBS AG. Morgan Stanley, Allen & Co., Citigroup Inc. and Centerview Partners worked with Time Warner Cable.