Comcast (NASDAQ: CMCSA) and Charter Communications (NASDAQ: CHTR) have made official what's been reported for weeks. As part of Comcast's attempt to acquire Time Warner Cable (NYSE: TWC) for $45.2 billion, it's divesting subscribers, consolidating regional operating areas and creating a new publicly traded company, SpinCo, in cooperation with Charter.
Among other things, the move will make Charter the nation's second largest cable operator, with 5.7 million video customers of its own and 8.2 million customers when SpinCo is added in.
The deal, which both parties continue to describe as "tax-efficient," will leave Comcast below the threshold of 30 percent of national MVPD subscribers even as it acquires Time Warner Cable's nationwide operations. A presentation on Charter's investor page extensively details the tax implications of the transaction.
"The realignment of key cable markets achieved in these transactions will enable Comcast to fill in our footprint and deliver operational efficiencies and technology improvements," Comcast Chairman-CEO Brian Roberts said in a press release and later reiterated during a webcast with analysts and interested parties.
The press release explained the deal's three key parts:
- Comcast will divest TWC systems, serving about 1.4 million customers, directly to Charter for cash.
- Comcast and Charter will transfer another 1.6 million existing TWC customers and 1.6 million Charter customers in a "tax-efficient like kind exchange" to improve geographic operational efficiencies.
- Comcast will form and spin off to its shareholders an independent, publicly traded company called SpinCo to operate systems serving about 2.15 million existing customers. Comcast and former TWC shareholders will own about 67 percent of SpinCo and Charter will get the other 33 percent. The nine-member board of directors will include six independent directors and three designated by Charter. Comcast will have no role in managing SpinCo.
In all, Charter will grow from the deal with a new footprint that is "easier to operate and allow us to provide better high quality services at the local level," Charter President-CEO Tom Rutledge said in the webcast.
This, he said, should translate "to better customer satisfaction and faster growth."
Growth is a key reason for consolidating the systems, Rutledge added, noting that some of the markets are "significantly under-penetrated … so I think we have a big runway in front of us."
An interesting part of the swap will be what happens to customers on Comcast's X1 platform and whether Charter will adopt that advanced platform as well.
"We have had preliminary discussions with Comcast about that and have a similar view with regard to cloud-based user interfaces," said Rutledge. Charter now partners with TiVo on much of its cloud-based set-top box technology. "If we can find a way to efficiently work together on that we'd be interested in doing so."
Comcast Cable President Neil Smit noted that Comcast would provide management services and a service agreement for the customers that are currently on X1 in those markets.
The deal did not include any swaps between Comcast and Charter, directly.
"Comcast felt … that it was more appropriate to utilize the spin structure for systems that would ultimately be divested. With regards to the swap, it was more efficient to utilize Time Warner Cable systems with regards to the transfer," Comcast CFO Michael Angelakis explained.
The whole deal could become moot if federal regulators put the kibosh on the TWC acquisition. Part of the reasoning behind the move was to illustrate to those regulators that the newly merged Comcast would not manage more than 30 percent of total U.S. MVPD subscribers. This, Roberts said, is about the same market share Comcast had in 2002 after it acquired AT&T Broadband and in 2006 when it acquired Adelphia. The big winner is Charter, with a subscriber base expansion of 1.4 million net customers.
MoffettNathanson analyst Craig Moffett pointed to the ever-shifting pieces of the acquisition, noting: "A Shakespearean comedy could be written of the Comcast-Charter-Time Warner Cable love triangle. Charter, the would-be bride, is jilted as her paramour, the sloppy but lovable TWC, is snatched away by her erstwhile friend, the domineering alpha-girl Comcast. But wait! Satisfied with her show of dominance, Comcast deigns to invite Charter to the bachelorette party… and that's where things get weird. It is now official that Charter will leave her TWC courtship with a sizable consolation prize. Sure, it's a slightly sordid story, but… well, all's well that ends well. After all, Charter is a story stock, and M&A is the most important chapter."
Slide detail explaining the Comcast-Charter subscriber spinoff. (Source: Charter)
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