US cableco Comcast has agreed to divest subscribers directly to smaller rival Charter Communications and sacrifice more of its customers to a new, spun-off cableco.
The move is designed to appease regulators concerned with its proposed merger with Time…
US cableco Comcast has agreed to divest subscribers directly to smaller rival Charter Communications and sacrifice more of its customers to a new, spun-off cableco.
The move is designed to appease regulators concerned with its proposed merger with Time Warner Cable (TWC).
In total the merged Comcast/TWC will shed 3.9 million video customers leaving it with less than 30 million subscribers and less than 30% of the multichannel video programming distributor market.
Under the plan Charter will acquire 1.4 million TWC customers for an undisclosed cash sum once the merger with Comcast has closed, taking Charter’s subscriber base to 5.7 million and making it America’s second-largest cableco.
Charter has mandated BofA Merrill Lynch, Credit Suisse, Deutsche Bank and Goldman Sachs to lead the financing for the transaction.
While the companies have not revealed the value of the deal, the Financial Times reported a figure of US$20bn without breaking it down, citing people familiar with the matter.
Comcast plans to divest a further 2.5 million subscribers by transferring them to a new independent and publicly-traded company, dubbed SpinCo. This will be 67%-owned by Comcast and TWC shareholders. The remaining 33% will be held by New Charter – a new holding company that will own 100% of Charter and hold its stake in SpinCo. New Charter will acquire its 33% by issuing new shares to Comcast and TWC shareholders.
Comcast will not hold an interest in SpinCo and its nine-member board will be made up of six independent directors and three designated by Charter, which will provide management services to SpinCo.
Comcast and Charter said the transfer of systems, asset purchases and the SpinCo acquisition will be valued at 7.125 times 2014 EBITDA– as defined by the parties – and Charter will make additional payments to Comcast over time as tax benefits from the asset sale are realised.
Comcast and Charter will also swap 1.6 million customers under the deal to rationalise their geographic footprints. The agreement is subject to antitrust and FCC approvals.
Charter CEO and president Tom Rutledge commented that the deal would “provide Charter with greater scale, growth opportunities and improved geographical rationalisation of our cable systems, which in turn will drive value for shareholders and more effective customer service.
“And through our meaningful ownership in and board representation at SpinCo, we can help it achieve similar market share growth in the markets it serves.”
For Charter the transactions represent a consolation prize after it lost out in the bidding war for TWC to Comcast. The market leader was able to offer TWC shareholders an all-stock deal which valued TWC shares at US$158.82 – significantly more than Charter’s US$132.50.
However, since Comcast agreed the TWC deal its stock price has dropped and a collar agreement was not included in the transaction, meaning the value of the deal has fallen.
Charter launched a proxy war at the end of March, lobbying TWC shareholders to block the deal. Now the John Malone-controlled cableco has a vested interest in the deal going through.
Whether the agreement will be enough to appease regulators remains to be seen. The divestitures appear to keep the combined Comcast/TWC entity’s market share of video at an acceptable level, however the merger’s detractors’ concerns centre on the company’s share of the high-speed broadband market.
Consumer interest group Public Knowledge has estimated that a combined Comcast-TWC would control nearly 50% of high-speed internet access.
Earlier this month the senate judiciary committee held a hearing to evaluate the deal. Comcast has also laid out its public interest case for the deal to the Federal Communications Commission (FCC) and filed its Hart-Scott-Rodino notification with the Department of Justice for antitrust clearance.
Comcast’s regulatory EVP David Cohen said in February that a nine to 12 month regulatory review was realistic, although some have suggested the process may last longer.
JP Morgan and Paul Taubman are acting as financial advisers to Comcast and Davis Polk & Wardwell and Willkie Farr & Gallagher are its legal advisers.
Goldman Sachs and LionTree Advisors are serving as lead financial advisers to Charter in connection with this transaction, and Guggenheim Securities is advising. In addition to providing the financing, BofA Merrill Lynch, Credit Suisse, and Deutsche Bank are also advisers to Charter.
Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis are representing Charter.
