Charter’s latest move, to table a bid for Bright House Networks, will further complicate the regulatory landscape behind US cable.
This makes both Brian Roberts of Comcast and John Malone of Liberty Media, hell bent on consolidating the US cable industry. Roberts because he is CEO of Comcast, mid-way through buying Time Warner Cable, and Malone, because he is the silent hand behind moves at Charter Communications.
Charter has a definitive agreement to buy Bright House through a freshly created subsidiary CCH I, paying $10.4 billion. Think of it this way, cable company number 1 buys cable company number 2, so cable company number 3 starts buying up 4, 5 and 6. In this case Bright House is 6th and brings with it 2 million video customers in central Florida. 4 and 5 in the market have no doubt rebuffed advances and that would be Cox and Cablevision.
Charter has about 5.9 million customers and will get 1.6 million from the deal with Comcast and Time Warner Cable, but also be a shareholder jointly with Comcast in a new public company that would have 2.5 million subscribers. If that one day that joint company ends up with Charter, and if we add the 2 million from Bright House Networks, Charter gets to around 12 million homes, around 22% of the US cable market, while Comcast Time Warner Cable would have 30 million, around 54% of the 55 million US cable homes.
The entire new business with Bright House will be conducted through a partnership, with Charter owning 73.7% and Bright House parent Advance Newhouse owning 26.3%. And only $2 billion in cash will actually change hands, the rest is this shareholding in the merged entity. It is obviously more complicated than that, in that some of these shares are common shares and some preferred, so the performance of the business going forward is likely to determine the exact amount that Advance Newhouse ends up getting.
Charter still needs shareholder approval, but that will come and also, far more peculiarly, it needs Time Warner Cable’s right of first offer to expire on buying Bright House. Obviously if Comcast gets to buy Time Warner, then it will have exhausted its appetite for buying Bright House and would meet regulatory issues, and it may be forced to drop that option anyway as a condition to the Comcast deal.
If Comcast is prevented from buying Time Warner Cable, then Charter would come after TWC, and the issue of what happens to Bright House and when, would fall into the background, to be decided later.
Charter’s point here is straightforward – it wants to be as big as it can get via transactions before it gets back to competing in the market, and it is also aware that Time Warner Cable and Bright House share technology so that buying one, helps with the other and it is inheriting part of Time Warner Cable from Comcast if that deal is successful. Following it so far?
Tom Rutledge, President and CEO of Charter Communications said, “Bright House Networks provides Charter with important operating, financial and tax benefits, as well as strategic flexibility. Bright House has built outstanding cable systems in attractive markets that are either complete, or contiguous with the New Charter footprint. This acquisition enhances our scale, and solidifies New Charter as the second largest cable operator in the US. I look forward to working with the Bright House team, whom we have known for years, in delivering great products and services to grow our market share.”
The family that runs Bright House have known Charter CEO Tom Rutledge for more than 20 years, because he managed cable systems that were part its partnership with Time Warner Cable prior to the formation of Bright House Networks.
Advance/Newhouse will get $5.9 billion of exchangeable common partnership units in the New Charter, and $2.5 billion of convertible preferred partnership units which will pay a 6% coupon, plus the $2 billion cash mentioned earlier.
In addition, Liberty Broadband ( the business set up to hold shares in both Charter and TWC for Liberty Media) has agreed to purchase, upon closing of the Bright House transaction, $700 million of newly issued New Charter shares. This is because this transaction will dilute Malone’s ownership of the entire pile to some 19.4% down from 26%, but it would have been worse had he not put up this $700 million. He has an agreement not to take his holding above 35% prior to January 2016, when his limit rises to 39.99%.
Malone also gets a voting proxy on its shares, capped at 6%, for the five years following the close of the transaction, so that he has the voting power of 25.01%, which gives him strong minority protection.
After the deal a new shareholders agreement will grant both Advance Newhouse and Liberty Broadband preemptive rights, allowing each to maintain their pro rata ownership in New Charter. The new company has 13 directors, 3 from Advance/Newhouse and three from Malone. This must have been a tough deal to write.
They two sides appear to have set up something of a stand-off for the foreseeable future, until that is, they enter into a big transaction (like buying TWC) when one may not have enough cash to keep that balance up.
Just what happens if Comcast fails to get Time Warner Cable is tough to work out in detail, but we would say that ALL of TWC would go to Charter, and so would Bright House, taking Charter to 17.8 million US cable homes, a company which could seriously stand up to Comcast at just 21 million and falling, so would put Comcast on course for more acquisitions.