By Shalini Ramachandran
Cable tycoon John Malone missed out on a big prize last year
when the company he backs, Charter Communications Inc., failed in
its bid to acquire Time Warner Cable Inc. But he's finding other
ways to once again become a formidable player in the U.S. cable
industry.
In the latest deal, Charter agreed to acquire Bright House
Networks LLC, a closely held cable operator with two million
customers, for $10.4 billion in cash and stock, the companies
announced Tuesday. Charter is already expected to gain management
control of several million more customers through divestitures if
Time Warner Cable's pending sale to giant Comcast Corp. closes.
If they win approval from regulators, the deals would leave
Charter with about 10.1 million owned and managed video customers,
not far off Time Warner Cable's 10.8 million. Mr. Malone's Liberty
Broadband Corp. has been Charter's biggest shareholder.
The 74-year-old knows a thing or two about the U.S. cable world.
A pioneer in the industry, he built Tele-Communications Inc. into a
giant through shrewd and calculated deal-making before selling it
to AT&T Inc. in 1999 for $48 billion. His venture was at its
peak when the cable-TV industry was booming.
These days, a new round of consolidation is afoot as pay-TV
providers gird for a future when consumers will be willing to drop
cable-TV connections in favor of online-video options, and when
broadband--not television--will be the centerpiece of a cable
company's business.
Mr. Malone, who wasn't available to comment Tuesday, is taking
steps to be at the center of that transformation. "As these
technologies become more complicated, just the ability to offer
them to a consumer in a rational way is going to drive
consolidation of ownership," he said at an investor day in
November. Even beyond just domestic deals, operators have to be
thinking on a global scale, because "the people you are ultimately
competing with"--like Netflix Inc.--"are selling their products and
services on a global, a world scale."
With the deals it's planning, Charter would become the
second-largest cable company behind a combined Comcast-Time Warner
Cable, as well as the fourth-largest pay-TV provider overall.
DirecTV, which has agreed to be acquired by AT&T, and Dish
Network Corp. would still be the second and third largest pay-TV
operators.
The Charter deals are contingent on Comcast's deal with Time
Warner Cable passing muster with the Federal Communications
Commission and the Justice Department. That merger has received
intense scrutiny from regulators and has been dogged with
delays.
"Assuming the Comcast deal is approved, the opportunity for
Comcast to get any bigger will be largely gone," said
MoffettNathanson analyst Craig Moffett. "Charter will be left on
the stage by itself and will be the only potential acquirer of
assets."
Indeed, Comcast, with few options to grow at home, is looking to
opportunities abroad. That is one area the company is expected to
target with a new $4.1 billion investment company it announced
plans to create Tuesday.
With Bright House, Charter will strengthen its geographic
footprint in the Midwest and Southeast, adding subscribers in
central Florida as well as Alabama, Indiana, Michigan and
California. An investor presentation by the companies said Bright
House generated $3.8 billion in revenue last year, up 6% from 2013,
and its "pro forma" Ebitda margin was 37%. (Ebitda refers to
earnings before interest, taxes, depreciation and
amortization.)
Under the deal's terms, Charter will pay Bright House
parent-company Advance/Newhouse $2 billion in cash, plus $8.4
billion in convertible-preferred partnership units and common
partnership units, which can be exchanged for Charter stock. Adding
Bright House's cash flow will reduce Charter's leverage, giving the
company around $6 billion in "excess debt capacity," the companies
said.
Charter would own 73.7% of the merged firm, while Bright
House-owner Advance/Newhouse would own 26.3%. But Mr. Malone's
Liberty Broadband would emerge with the largest voting interest of
any shareholder at 25%. (Mr. Malone and the Newhouse family have a
history together, having been involved in the creation of Discovery
Communications Inc. decades ago.)
It's unclear whether Charter would be successful in rolling up
other operators. Mid-sized and smaller cable companies like Cox
Communications and Mediacom Communications Corp. are family owned,
and industry executives say they haven't gotten signs the two
companies are angling to play in the wave of cable
consolidation.
The consolidation among distributors may put pressure on U.S.
media companies to bulk up through their own deals as they scramble
to deal with changing consumer habits and fundamental changes in
their businesses. TV-channel owners may need greater scale to
ensure their content gets carriage, whether on traditional cable
systems or on emerging "over the top" Web-TV services from such
firms as Apple Inc. and Sony Corp.
On a call with analysts, Charter Chief Executive Tom Rutledge
said he continues to expect the Comcast-TWC deal to close and noted
that Charter's Bright House deal could actually ease some of the
regulatory pressure.
That's because since the 1990s Time Warner Cable has been
handling programming negotiations and technology deals for Bright
House under an arrangement between the firms. That relationship,
which regulators may see as expanding Comcast and Time Warner
Cable's influence, would cease if Charter acquires Bright
House.
"We think this actually makes the deal more likely to close,"
Mr. Rutledge said.
Mr. Malone set off the wave of pay-TV consolidation when Liberty
invested in Charter two years ago. As part of the Bright House
transaction, Liberty has agreed to buy $700 million of shares in
the new company after the deal closes. That will give Mr. Malone's
outfit a 19.4% equity stake, less than the Newhouse family that
controls Bright House owner Advance/Newhouse. But Liberty will be
the largest single voting shareholder.
Advance/Newhouse will have its voting stake capped at 23.5% for
now, but by getting equity in the new company the Newhouse family
will be able to continue to play a role in the U.S. cable
market.
"Charter would have liked to have paid more cash," but "I think
Newhouse was more interested in having equity for growth upside,"
Charter Chief Financial Officer Chris Winfrey said on the call.
Write to Shalini Ramachandran at
shalini.ramachandran@wsj.com
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