By Sarah Rabil,Joe Flint and Amol Sharma
Charter Communications Inc. is close to sealing a $55 billion
deal for Time Warner Cable Inc., giving cable mogul John Malone the
prize he has been chasing for two years.
The acquisition by Charter, which is backed by Mr. Malone's
Liberty Broadband Corp., would vault the cable operator into the
ranks of the biggest U.S. broadband and pay-television
companies.
The firms have agreed to terms for a cash-and-stock deal that
would value Time Warner Cable at $195 a share, according to people
familiar with the matter.
As part of the transaction, which could be announced as early as
Tuesday, Charter would also merge with small operator Bright House
Networks, said people familiar with the deals. The combined cable
giant would have 23 million total customers, second only to
Comcast's 27 million among cable operators.
News of the deal talks comes only a month after Time Warner
Cable went back on the block after Comcast terminated the
companies' planned $45.2 billion merger in the face of serious
pushback from Washington regulators. A Charter-TWC deal could be in
for a stringent review in Washington as well, some analysts have
said.
Charter, which has 5.9 million residential subscribers in more
than 25 states, and Mr. Malone are betting that increased scale
will help the company navigate the industry's choppy waters.
Operators must contend with the onset of cable "cord-cutting" as
frustrated consumers drop connections, the rise of streaming-video
competitors from Netflix Inc. to Apple Inc. and expected fights
with TV-channel owners over which networks are worth keeping in a
bundle.
"No one has ever had a better sense of the multichannel world
than John" Malone, said Leo Hindery, a veteran cable-industry
executive who is managing partner at the private-equity firm
InterMedia Partners. "Obviously he sees in Charter and Time Warner
Cable a way to perpetuate a legacy that is unrivaled."
In 2013, Charter made multiple offers to buy Time Warner Cable
but was rebuffed. Its efforts culminated in a hostile bid early
last year that was headed off when Comcast struck its ill-fated TWC
deal.
This time, Charter took a more light-handed approach. Mr. Malone
got more involved, people familiar with the matter say, calling
Time Warner Cable Chief Executive Rob Marcus in the early stages of
Charter's pursuit to indicate he wanted a friendly deal. Charter's
camp made a point of not submitting a lowball bid that would put
off Time Warner Cable, the people said.
Time Warner Cable shareholders can choose $100 a share in cash
and $95 in Charter stock, or $115 in cash and the remainder in
stock, a person said. The price tag represents a 14% premium to
Time Warner Cable's closing price of $171.18 on Friday.
If regulators block the deal, Charter could owe Time Warner
Cable about $2 billion, or Time Warner Cable could be responsible
for the breakup fee if it accepts an offer from a rival suitor, a
person familiar with the matter said. Comcast's deal with Time
Warner Cable had no breakup fee.
The backlash to Comcast's bid for Time Warner Cable at the
Federal Communications Commission and Justice Department left many
cable executives and investors wondering whether any
transformational cable-industry deal could withstand regulatory
review.
FCC Chairman Tom Wheeler called cable executives including Time
Warner Cable's Mr. Marcus and Charter CEO Tom Rutledge in recent
days to convey that they shouldn't assume the agency is against any
and all future deals just because of what happened with Comcast,
according to a person familiar with the matter.
Liberty will help fund the deal by buying $5 billion of new
Charter shares, and Mr. Malone's stake in the combined entity will
fall below 25%, a person familiar with the matter said.
Mr. Malone will be joined as a significant shareholder by the
Newhouse family. When Charter originally agreed to buy Bright House
before the Time Warner Cable deal was reached, the transaction
would have given the Newhouse family, which controls Bright House
owner Advance/Newhouse, a larger equity stake than Mr. Malone but a
smaller voting stake.
Liberty will probably still retain a larger voting stake in the
agreement for the bigger entity, said Craig Moffett, an analyst
with MoffettNathanson.
For Mr. Malone, the deal would mark his return as a force to be
reckoned with in U.S. cable, putting him in a position to influence
how the industry transitions into a media world dominated by
streaming video and broadband. Since taking a big stake in Charter
in early 2013, he has been preaching the gospel of consolidation to
investors, emphasizing how cable operators aren't collaborating the
way they used to in the early days of the industry and are
therefore missing out on opportunities to fight back against
Netflix and other competitive threats. The 74-year-old was a
formative figure in the early days of the cable industry. He took
over debt-ridden Tele-Communications Inc. in his early 30s, guiding
it through a period of uncertainty and through hundreds of
acquisitions in the 1970s and 1980s that made it the largest U.S.
cable-TV operator.
In 1998, he sold TCI at its height for $48 billion to AT&T
and turned his attention to investments in Europe.
AT&T later sold its cable assets to Comcast.
Along the way, Mr. Malone developed a reputation for ruthless
negotiating with lenders and TV programmers--former U.S. senator Al
Gore labeled him "Darth Vader." He tangled with lawmakers in
congressional hearings over rising rates and customer-service
complaints. He also fought with municipalities over the renewal of
"franchises" allowing TCI to offer service, sometimes taking them
to court.
But at pivotal moments for the cable industry--such as when the
government enacted laws governing the business in 1984 and 1992 and
when broadcasters and cable channels began demanding a slice of
monthly fees--he was also viewed as a leader and champion for cable
operators' interests.
The cable-TV market that Mr. Malone and others raced to build at
a breakneck pace is now fully mature--and it has actually begun to
contract. Consumers frustrated by rising cable-TV prices are
dropping service in favor of relatively inexpensive streaming-video
services.
Now, Mr. Malone will be tested at another crucial moment for
cable. The new colossus formed by the merger of Charter and Time
Warner Cable would be far bigger than TCI's 11 million subscribers
and would face very different challenges.
"There are lots of challenges this time around but there is no
better visionary to address them," said Mr. Hindery, who ran TCI
for Mr. Malone for many years.
To be successful in the coming years, cable operators will need
to lean heavily on their broadband businesses to generate profit
growth while limiting shrinkage in their TV business. That means
investing in broadband infrastructure, streaming-video services and
other technologies.
To be successful in the coming years, cable operators will need
to lean heavily on their broadband businesses to generate profit
growth while limiting shrinkage in their TV business. That means
investing in broadband infrastructure, streaming video services and
other technologies.
For Time Warner Cable, the pact with Charter continues a wild
ride over the past two years. The company was struggling last year
with video-subscriber losses and other problems, and Comcast's
$45.2 billion buyout looked like a good exit for shareholders. Then
the surprising turn of events in Washington left the company in the
lurch--only to result in what looks like another deal in short
order.
A combined Comcast-TWC would have served about 35 million
residential and business Internet customers. It also would have had
at least 57% of the market for broadband Internet service, defined
by the FCC as speeds of 25 megabits a second and higher. A
Charter-TWC-Bright House combination would serve nearly 20 million
residential and business Internet customers.
Before a deal was struck, competition threatened to once again
derail the plans of Charter and Mr. Malone: European
telecommunications group Altice SA, backed by French cable baron
Patrick Drahi, was in hot pursuit of Time Warner Cable in recent
days. Mr. Drahi met with Mr. Marcus on May 20 to discuss a
potential cash-and-stock deal, The Wall Street Journal
reported.
Now that Charter and Time Warner Cable have agreed to a price as
high as $195 a share, Altice doesn't plan to submit a higher offer,
according to people familiar with the matter.
For Altice, a deal the size of TWC would have been a bold move
just days after the company surprised investors with its agreement
to buy a 70% stake in U.S. midsize cable operator Suddenlink in a
deal valued at $9.1 billion including debt.
Shalini Ramachandran and Dana Cimilluca contributed to this
article.
Write to Amol Sharma at amol.sharma@wsj.com
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