Putting speculations to rest, Charter Communications, Inc. CHTR has finally made two major announcements pertaining to pending deals.
The company has reached an agreement to buy Time Warner Cable Inc. TWC – the second largest cable multi service operator (MSO) in the U.S. The total value of the deal stands at $78.7 billion, including debt. Taking into account Time Warner Cable's diluted shares outstanding as of March 31, the stock portion of the deal has been pegged at $55.76 billion. Moreover, as per the latest quarterly report, Time Warner Cable had long-term debt of $22.64 billion.
Also, Charter will take over Bright House –the sixth largest U.S. cable operator– for $10.4 billion. Following these developments, Time Warner Cable shares rallied over 10% in the pre-market trading session whereas Charter’s shares gained nearly 4%. Charter will pay $195.71 per share of Time Warner Cable, which is at a premium of approximately 14% to Time Warner Cable’s closing price yesterday.
We remind investors that in Jan 2014, Charter had offered $132.50 per share of Time Warner Cable, including $83 in cash. However, the company had lost to Comcast’s higher bid of $158.82 per Time Warner Cable share.
Meanwhile, in the month of Apr 2015, Comcast Corp. CMCSA had put an end to its 14-month long negotiation of the $45.2 billion takeover deal concerning Time Warner Cable owing to strong reservations expressed by the Federal Communications Commission (FCC) and the Department of Justice.
Prior to that, on Mar 31, 2015, Charter had entered into a definitive agreement with media group Advance/Newhouse to acquire a majority stake in Bright House, which has nearly 2 million cable subscribers.
Will FCC Oblige This Time?
After the termination of the Comcast-Time Warner Cable deal, many cable executives opined that mergers between cable companies may not be possible in the future. However, Tom Wheeler, the U.S. Federal Communications Commission Chairman stated that the agency is not against merger activity in the cable industry.
However, the Charter-Time Warner Cable deal may face close scrutiny by regulator Federal Communications Commission. Together the merged entity of Charter Communications, Time Warner Cable and Bright House will serve 23.9 million customers across 41 states. However, the figure will be below the FCC’s 30% market share benchmark.
We remind investors that while disapproving Comcast’s earlier attempt to take over Time Warner Cable, the FCC’s major antitrust concern was the fact that the combined entity would have gained 35% control of the U.S. pay-TV market and almost 60% of the high-speed broadband (Internet) market. Notably, in Jan 2015, the FCC had raised the download and upload speeds of Internet to be deemed as broadband. The recent changes made in broadband speed would have raised the combined Comcast-Time Warner Cable market share to more than 60% as Comcast serves a high percentage of high-end broadband users.
Bottom Line
In spite of FCC’s strict vigil, we believe that the U.S. telecom industry is likely to witness more mergers and acquisitions going forward. The U.S. pay-TV and high-speed data markets are intensely competitive. Success in these businesses largely depends on technical superiority, quality of services as well as scalability which will compel struggling players to merge with larger peers. Notably, DIRECTV is also awaiting a regulatory approval for its acquisition by AT&T Inc. T.
We believe that if the Charter-Time Warner Cable deal crosses the final lap, it will be a win-win situation for both the companies. Time Warner Cable, together with most of the cable TV operators in the U.S., is getting marginalized gradually by fiber-based video offerings of telecom giants and online video streaming services of low-cost operators.
On the other hand, the alliance will benefit Charter in terms of geographic expansion and operating cost synergies, which will in turn boost its bottom line and free cash flow. Charter will also be able offer enhanced services and will provide more streaming video product options.
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