By Shalini Ramachandran
The collapse of Comcast Corp.'s bid to acquire Time Warner Cable
Inc. has led to a flurry of talks in the cable industry over other
possible deals. And there is an unlikely player at the center of
the unfolding drama: the Newhouse family's Bright House Networks
LLC.
In the week since Comcast's deal fell apart, Time Warner Cable
and Charter Communications Inc. have separately been in touch with
Bright House at the highest levels to discuss an acquisition of the
company, people familiar with the talks say. The talks are
preliminary, the people said.
For Charter, the fourth-largest U.S. cable operator, acquiring
Bright House, an operator with two million customers and steady
cash flow, could be a steppingstone to go after the much larger
Time Warner Cable, people familiar with Charter's thinking
said.
Such a deal would strengthen Charter's balance sheet and
increase its borrowing capacity. Charter had announced a $10.4
billion acquisition of Bright House in March, but it was contingent
on the Comcast deal closing, so the two sides must renegotiate.
Charter and its largest shareholder, Liberty Broadband Corp.,
have made no secret of their interest in Time Warner Cable. More
than a year ago, Charter pursued a hostile takeover of Time Warner
Cable before Comcast entered with its offer.
One reason Time Warner Cable rejected Charter's bids last time
around was its concern about the resulting debt load on the
combined company. This time, Charter is interested in friendly
negotiations as it lays the groundwork for a potential bid, people
familiar with the company's thinking say.
For Time Warner Cable, an acquisition of Bright House would
accomplish two things: it would take away an asset that could help
Charter's deal ambitions, while making Time Warner Cable more
expensive and complex to acquire.
"Bright House now finds itself as kingmaker in the cable
consolidation story," said Craig Moffett, analyst at
MoffettNathanson. "Whoever gets Bright House has the inside track
to roll up the rest of the industry."
Buying Bright House could help Time Warner Cable fend off
Charter, especially if TWC also raises its own debt levels by
borrowing money for a stock buyback, said Neil Begley, analyst at
Moody's Investors Service. "I wouldn't call it a poison pill, but
it's a bigger pill to swallow," he said.
Charter's last offer for the company was valued in January 2014
at $132.50 a share. Time Warner Cable shares closed at $155.52 on
Thursday, after the company reported first-quarter results. Time
Warner Cable posted solid subscriber additions, though profit fell
on higher expenses and revenue was below Wall Street estimates.
Charter reports earnings on Friday.
Charter and Time Warner Cable each believe they can offer a
better deal to the Newhouse family that controls Bright House. The
cable business is the biggest contributor of profit to the family's
media empire, which also includes Advance Publications, which owns
magazine giant Condé Nast.
Part of Time Warner Cable's likely pitch to the Newhouses would
be that they would wind up the largest individual shareholder of
the combined company, with more influence than they would have
through a tie-up with Charter, one of the people familiar with Time
Warner Cable's thinking said. In Charter's March deal with Bright
House--the one contingent on the Comcast transaction closing--John
Malone's Liberty Broadband would have emerged with the largest
voting stake of any individual shareholder at 25%.
Charter and Advance/Newhouse agreed as part of that deal that if
Comcast-Time Warner Cable failed to close, there would be a 30-day
"good faith" period during which they could try to renegotiate
their deal, the people familiar with the matter said. Time Warner
Cable can still make its own offer to Bright House during that
period, which is ongoing.
Charter may tout its operating team and the vote of confidence
from cable pioneer Mr. Malone as a sign that it is the better
partner for the Newhouses. The Newhouse family highly regards
Charter Chief Executive Tom Rutledge, people familiar with the
matter said.
If the various talks result in an eventual combination of all
three players-- Time Warner Cable, Charter and Bright House--that
giant would serve about 24 million total customers, in striking
distance of Comcast's roughly 27 million.
Complicating Charter's pursuit is a long-standing relationship
between Time Warner Cable and the Newhouse family that dates back
to the early 1990s.
As part of that relationship, Time Warner Cable for years has
negotiated programming and technology deals for Bright House, in
return for an annual fee. Time Warner Cable also has the right of
first offer on the family's cable systems, subject to some
exceptions, and can choose to match or beat any offer Charter makes
to Bright House, people familiar with the agreement said.
Time Warner Cable CEO Rob Marcus helped draft the original
partnership agreement when he was a lawyer before joining Time
Warner Inc., the former parent of Time Warner Cable. The
NewSHYhouse family agreed to sell to Charter earlier this year
largely because it may have been difficult under the proposed
Comcast-Time Warner Cable deal to maintain that hugely beneficial
relationship.
But now, doing a deal with Charter may not make sense unless
it's along with a Time Warner Cable deal, one person close to the
deal talks noted. That is because just a Charter-Bright House
combined company alone wouldn't achieve the programming scale
benefits that Bright House already enjoys today under its agreement
with Time Warner Cable.
The Newhouse family could choose not to sell Bright House, a
person familiar with the matter said, and continue to watch how the
takeover drama among the larger companies plays out.
Dana Mattioli contributed to this article.
Write to Shalini Ramachandran at
shalini.ramachandran@wsj.com
Access Investor Kit for Charter Communications, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US16117M3051
Access Investor Kit for Comcast Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US20030N1019
Access Investor Kit for Comcast Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US20030N2009
Access Investor Kit for Time Warner, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8873173038
Access Investor Kit for Time Warner Cable, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US88732J2078
Subscribe to WSJ: http://online.wsj.com?mod=djnwires