Market Insight

Charter gets more Time (Warner Cable), its future looking brighter

May 26, 2015  | Subscribers Only

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Charter Communications reaffirmed its commitment to cable consolidation by announcing its intention to merge with Time Warner Cable (TWC) and acquire Bright House Communications. After two years since first pursuing TWC, Charter Communications is slated to acquire the nation’s second largest cable operator for $78.7 billion (including debt). At the same time, Charter will acquire Bright House Networks for $10.4 billion, after the two partiers reworked their deal since it was jeopardised by the TWC/Comcast break-up fallout. When the dust settles, there will be a new cable operator that will rival Comcast in size - Charter will have 23.9 million customers in 41 states and a total cable video subscriber base of 17.3 million, second only to Comcast’s 22.3 million video subscribers.

Only a month has passed since the regulators pushed back enough for Comcast to break off the TWC deal and now TWC is ready to start anew with Charter Communications. For each TWC share, Charter will pay $100 in cash and 0.5409 shares of Charter ($95.71) for a combined value of $195.71 at a total equity value of $56.7 billion. TWC shareholders can also elect to receive $115 in cash and 0.4562 Charter share for every TWC share. For Bright House Networks, which has 2 million video subscribers, Charter will pay $5.9 billion in common shares, $2.5 billion in preferred shares and $2.0 billion in cash. Liberty Broadband will help fund the deal by buying $5 billion of new Charter shares.

Following the approved transactions and depending on the price election by Time Warner Cable shareholders, TWC will own 40%-44% of the new company, Charter will own 24%-26%, Advance/NewHouse 13%-14% and Liberty Broadband 19%-20%.

Our analysis

It was almost inevitable that Charter would mount a second attempt to acquire TWC, following the collapse of Comcast’s efforts. The challenge will be for Charter to manage such a massive acquisition on not only one front, but two. By combining Bright House Networks into the deal, Charter will have to manage additional complexities, increasing the number of potential problems that regulators may have for the deal.

Then again, the dual acquisition of TWC and Bright House is a return to the roots for both companies who were sister entities, having been split during the AOL/Time Warner combination. Still, both companies have continued to negotiate programming deals in tandem, recognizing that there are synergies between the two still. All things being equal, if Charter hadn’t put the lock on Bright House, their recombination would have seemed natural.

However, that turn of events was in the cards for both companies, but coming from the hand of a different dealer. If Charter plays its cards right, it will have formed the second largest cable business in the USA, the third largest pay TV company. That’s not to say that Charter’s been dealt a flush, there are still serious questions to be answered.

Among the first questions to be asked by regulators is what number of broadband subscribers (those with greater than 25Mbit) will the newly formed company count as subscribers. This was the main sticking point for Comcast’s bid, if that merger had gone through more than 60% of all broadband subscribers would have belonged to the company. This is not a problem for Charter/TWC/Bright House, TWC and Bright House are significantly behind Comcast in terms of HSD access speeds, and Charter is only a small part of the overall HSD landscape.

IHS believes that regulators are going to have less to object to for the Charter/TWC/Bright House deal. First there is not the same number of HSD subscribers at 25Mbit, nor is the combination of the companies likely to create a near monopoly in broadband service like Comcast. Second, the three operators don’t have overlapping footprints. Third, none of the companies is a technological vendor in the same way that Comcast is with licensing of its X1 platform. Fourth, none of the companies double-dip significantly in the content and delivery sides of the business.

There is no guarantee that the merger will make it through the trials of regulatory inquiries, but it does seem likely that the new company does have a better chance for success than did Comcast. For subscribers of TWC and Bright House, the long term effect of the merger will likely be both positive and negative. In the short to mid terms customers will likely enjoy the benefits of technological upgrades. In the long-term those upgrades will inevitably come with a long-term hidden cost, ARPU increases at a slightly accelerated rate.

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