By Ben Fox Rubin
Comcast Corp. and Charter Communications Inc. reached a deal for
Comcast to divest itself of 3.9 million subscribers, in a move
aimed at helping it smooth over regulatory concerns involving its
$45 billion deal for Time Warner Cable Inc.
As part of the agreement, Comcast will sell 1.4 million existing
Time Warner Cable customers directly to Charter for an estimated
$7.3 billion in cash.
Additionally, Comcast plans to spin off a new, publicly traded
company that will serve another 2.5 million existing Comcast
customers. Comcast shareholders would own 67% of that new company,
while Charter will receive 33%. As part of the deal, Charter will
be free to buy the new company outright in four years. The two
cable operators estimated the new company would have an enterprise
value of $14.3 billion.
The agreements are contingent on the Comcast-Time Warner Cable
merger being completed.
Charter and Comcast also plan to swap another 1.6 million Time
Warner Cable customers and 1.6 million Charter customers in a
like-kind exchange, which the companies said will improve their
geographic footprints. Included in the swaps are Charter's Los
Angeles and New York-area systems. By gaining these systems through
the swaps, Comcast, assuming it completes the TWC acquisition,
would dominate the biggest TV markets of New York and Los
Angeles.
To alleviate regulatory concerns over its TWC purchase, Comcast
had said it would divest about three million subscribers. The
divestitures announced on Monday are bigger in scale and would
reduce Comcast's number of managed residential customers to less
than 30% of the pay-TV market.
"Today's agreement follows through on our willingness to divest
subscribers, while also marking an important step in our merger
with Time Warner Cable," Comcast CEO Brian Roberts said.
In a sign of the pushback that the Comcast-TWC merger is facing,
Univision Communications CEO Randy Falco publicly expressed
concerns on Monday about the implications of the deal for Hispanic
audiences. Combined with Time Warner Cable, Comcast "will be the
top TV distributor in 19 out of the top 20 Hispanic markets," which
he said gives the company "staggering influence over Hispanic
consumers." Comcast's NBCUniversal owns Telemundo, one of
Univision's main rivals in the Spanish-language television
business.
Mr. Falco said Comcast was the only major pay-TV operator to not
distribute Univision's sports network. "Either Comcast doesn't
understand that soccer is a passion point for Hispanics or they
don't support competitors who have competing services," he
said.
For Charter, the deals are something of a consolation prize
after its monthslong pursuit of Time Warner Cable was trumped by
Comcast's agreement in February to buy TWC. Charter, whose biggest
shareholder is John Malone's Liberty Media Corp., had sought
control of TWC as part of a growth strategy aimed at consolidating
the cable industry.
With this deal, Charter will move up in the ranks to the
second-largest cable operator in the U.S., compared with its
current status as the fourth-largest U.S. cable operator, behind
Comcast, Time Warner Cable and Cox Communications Inc. Charter said
Monday that, following the deals, it will have an estimated 5.7
million video customers and manage another 2.5 million through its
agreement with the new company. That gives it a total of 8.2
million video customers, or nearly double its current total.
Charter will oversee technology and programming relationships on
behalf of the new company, giving Charter increased scale in buying
power. Charter Chief Executive Tom Rutledge will be chairman of the
new company.
Charter has agreed not to purchase any shares of the new company
for at least two years or acquire more than a 49% stake in the two
following years. After four years, Charter could buy the company
outright, though other material events could lift its restrictions
sooner, according to a regulatory filing outlining the terms.
While Charter's operations are now spread across a large part of
the U.S. Mr. Rutledge said on a conference call with analysts
Monday that the deals will result in Charter having a stronger
presence in the Midwest and Southeast.
The company will acquire systems in Ohio, Kentucky, Wisconsin,
Indiana and Alabama, while divesting itself of systems in
California, New England, Tennessee, Georgia, North Carolina, Texas,
Oregon, Washington and Virginia. Meanwhile, the new company will
own systems that are near Charter systems in Michigan, Minnesota,
Indiana, Alabama, Eastern Tennessee, Kentucky and Wisconsin.
Separately, Charter on Monday reported a first-quarter loss of
$37 million, or 35 cents a share, narrowing from a year earlier
loss of $42 million, or 42 cents a share.
Revenue jumped 15% to $2.2 billion, helped by the July
acquisition of Cablevision Systems Corp.'s Bresnan Broadband. Video
and Internet revenue grew, though voice revenue declined.
Charter found success recently in its effort to slow its
video-subscriber losses by focusing on speeding up its broadband
speeds and adding more high-definition TV channels. The company
gained 18,000 customers in the latest period, compared with losing
25,000 a year ago.
Charter also added 136,000 Internet customers in the first
quarter, compared with 107,000 a year ago.
Shalini Ramachandran contributed to this article.
Write to Ben Fox Rubin at ben.rubin@wsj.com
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