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  (Source: Lonely Island)
Malone has crafted a three-way deal worth $66B USD, which would created America's third largest telecommunications firm, if approved

It's back, baby.

After being outbid by Comcast Corp. (CMCSA) in a bid to purchase Time Warner Cable Inc. (TWC), Charter Communications, Inc. (CHTR) resigned to purchasing privately held cable provider Bright House Networks, in addition to buying up some of the customers shed in the TWC/Comcast merger.  But after the Comcast acquisition collapsed amid mounting regulatory scrutiny, Charter was rumored to be dropping its bid for Bright House and committing to a more serious courtship of Time Warner Cable.

I. The "King of Cable" Looks to Resurrect His TCI-era Dominance

Ultimately the latter rumor -- a tangle with Time Warner Cable -- proved accurate, but it turns out that Malone is still hoping to secure Bright House Networks, as well.  In other words, this deal is a three-way affair, with Charter steering the action.

The proposed merger between Charter, Bright House, and TWC would create the nation's second largest cable service provider.  That said, the end result isn't quite as monolithic as the proposed Comcast and Time Warner merger, which would have combined the nation's two largest cable telecommunications service providers had it survived.

John Malone
The deal's enigmatic mastermind is the "king of cable", John Malone. [Image Source: SeekingAlpha]

The deal is masterminded by billionaire investor telecom mogul John Malone, an investor who some call the "king of cable".  Malone heads Liberty Media Corp. (LMCA)(LMCB)(LMCK) who pushed the merger prospect via its Liberty Broadband subsidiary.  Liberty Broadband is Charter's largest single shareholder with a 27.3 percent stake in Charter.  Malone's goal was effective to use Liberty and Charter's combined well of cash and credit to purchase the assets needed to form a substantially larger cable company.  The end goal appears to be to forge a strong national challenger to Comcast.

If he's successful in that quest, Malone would realize quite the comeback.  Back in the 1980s Malone had built Tele-Communications Inc. (TCI) into the nation's largest cable television service provider.  Malone left TCI in 1996 after more than two decades as President of the company.  In its hey-day TCI was indeed the king of cable, but by the 1990s it was struggling to maintain that lead.  Crucially in his final years Malone failed to seal a deal with "Baby Bell" Bell Atlantic.

TCI logo

After Malone left, TCI would go on to be acquired by Charter, who eventually sold it to Comcast.  You could argue, though, that Comcast's dominant position was built partially on the somewhat dimmed remains of the TCI network Malone left behind in the 90s.  
Charter logo
Time Warner cable
Bright House networks

Now he's envisioning a three way merger that would change the landscape of cable.

II. The Three-Way Merger, by the Numbers

If the three way deal closes, the combined entity would serve an estimated 20 percent of the broadband internet market in the U.S., versus Comcast's roughly 33 percent, according to MoffettNathanson.  MoffettNathanson principal analyst Craig Moffett sums up the thoughts of many, remarking to Reuters:

[While the deal is smaller] one has to be sober about genuine risks that this deal could still be rejected.

The possibility of rejection looms due to the question of whether the three-way merger might reduce competition in some regards, particularly if you ignore satellite-based services and focus exclusively on the cable space.  U.S. Federal Communications Commission (FCC) Chairman Thomas "Tom" E. Wheeler released a brief perfunctory statement, commenting:

The commission will look to see how American consumers would benefit if the deal were to be approved.

In addition to having to pass FCC regulatory scrutiny, the deal would also have to escape being challenged by the U.S. Department of Justice (DOJ) whose Antitrust Division can approve of mergers by declining to sue to block them within the allotted window.  The deal will also have to pass state antitrust scrutiny, particularly in TWC + Charter's top markets such as California, New York, and Texas.  That said, it's the federal regulatory approvals that typically determine whether a deal can close or not.

Merger by the numbers
(Before an after the merger -- in millions of subscribers.)

Charter trails several smaller cable rivals including AT&T Inc. (T), Verizon Communications Inc. (VZ), and (privately held) Cox Communications, Inc. in market share.  However, it's still the country's sixth largest cable service provider, and eight largest provide of service when satellite is factored in.  Time Warner, meanwhile is the second largest cable service provider, but trails satellite firm s DirecTV (DTV) and DISH Network Corp. (DISH), in addition to Comcast.  

From a size standpoint, the deal isn't overly egregious.  In fact the $48.5B USD DirecTV/AT&T deal -- is far more risky from a pure numbers perspective.  Combined AT&T and DirecTV would have as many as 35 million cable and satellite internet subscribers, while Charter, Bright House Networks, and Time Warner would cumulatively serve around 17.3 million subscribers, according to Charter's presentation on the deal.  And for comparison's sake the Comcast + TWC tieup would have created a cable company more than twice the size of Charter + TWC, with a hypothetical 31 million combined subscribers.

Charter office
[Image Source: AP]

That said, the AT&T/DirecTV deal is widely noted to have a bit of a regulatory advantage as the pair compete in slightly different service markets (cable vs. satellite service) even if they do ultimately overlap.  By contrast Bright House Networks, Charter, and TWC are all in the same service subsector -- cable services.

AT&T and DirecTV
Regulators are leaning towards approval on the AT&T/DTV merger, large as it may be.

Ultimately, one thing working in the deal's favor is that that there is no obvious better buyer than Charter out there.  That's an important consideration as Time Warner Cable is clearly in the mood to sell itself to somebody.  Facing a roughly 2-to-1 gap in customers versus Comcast, Time Warner Cable's shareholders have been pushing to find the right merger, but they're likely a little wary of regulatory barriers, following the collapse of the Comcast deal.

III. Sweetning the Pot: The Cost of a Deal

Malone has done a good job sweetening the pot, from an investor standpoint, at least.  In Jan. 2014, after a couple of preliminary bids, he made a finally pitch to TWC of $37.3B USD in cash and stock, an offer that gave it an effective valuation of $61B USD.  Comcast's bid came in May 2014.  And while it may seem like a mistake in retrospect, it did increase the immediate payout $48.5B USD in cash and stock, while raising the total valuation with debt to $67.1B USD.

To bring TWC back to the table, Malone steered Charter to a bid of $56B USD in cash and stock, a deal which would pay TWC shareholders approximately $195.71 USD/share, and value TWC at a total (including debt) of $78.7B USD.  That's a tidy sum and nearly twice what Malone was initially willing to pay.

Clearly the Comcast deal was good for TWC, if only from a value perspective.

Time Warner and Charter
[Image Source: AP]

Thus far there's no clear-cut opposition to the deal, even if there is a strong hypothetical that such opposition may mount.  Public Knowledge, who rallied the consumer advocacy cry against the Comcast + TWC merger, was reserved not making its position immediately clear.  Its president, Gene Kimmelman, a former DOJ antitrust regulator, commented to Reuters:

It's more of an FCC focus and there they have still a heavy lift. Will cable prices go up? Will broadband prices go up?

Charter will have to pay a $2B USD breakup fee if the deal collapse.  In the good news department for it, though, sources told Reuters that Altice SA (AMS:ATC) a French telecomm and former bidder for TWC was out of the picture and would not be submitting a counteroffer.  Also good news for the deal, Comcast CEO Brian Roberts appeared to be relatively magnanimous over Malone's proposed plans, commenting:

This deal makes all the sense in the world.  I would like to congratulate all the parties.

One factor working in favor of the deal is Charter and Bright House's relatively good customers service reputations.  Unlike a merger with Comcast, which brought with it the baggage of an industry-worst reputation in customer service, according to independent rating agencies and reviews, a deal with the better-liked Bright House and Charter might actually be a boon for customer of Time Warner Cable -- a telecom with a less than stellar reputation of its own.

In addition to the $56B USD in cash and stock going towards TWC shareholders, Charter is ponying up $10.4B USD in cash and stock to the owners of Bright House Networks, taking the total spent on the two deals to $66.4B USD.  It's unclear how much of that is stock, but it sounds like Charter will have sufficient cash and debt facilities to seal the deal from a shareholder standpoint.  Currently it's levied $31B USD in debt to close the deal.

Cable Profits
John Malone's bid to challenge Comcast for cable dominance is by no means short on ambition.
[Image Source: PopSugar/BizJournals]

Among the financial advisers involved in the deal either in an advisory role or in providing credit to fuel the three way merger include a who's who of the banking world.  In Charter's corner there's Goldman Sachs Group Inc. (GS), Aryeh Bourkoff's hedge fund LionTree Advisors LLC, Guggenheim Partners, LLC's Securities wing, Bank of America Corp.'s (BAC) investment arm Merrill Lynch; and Credit Suisse Group AG (CS).  Time Warner Cable is backed by Morgan Stanley (MS), underwriter Allen & Comp LLC., Citigroup Inc. (C), and the recently launched investment bank Centerview Partners.  Lastly, Bright House Networks brings Swiss bank UBS AG (SWX:UBS), law firm Sabin, Bermant & Gould LLP, and Sullivan & Cromwell LLP, another business law firm.

In weeks and months to come we'll get a better view of exactly how much opposition this deal will face.  But it's immediately clear that this three-way deal is a huge payday for TWC and Bright House investors, and if approved will seriously reshape the face of telecommunications in the U.S. alongside the AT&T/DTV merger.  All three companies in the deal have a lot riding on it.

Nobody has more at stake in the bold merger bid than the king of cable himself, John Malone.  Will he enjoy another hurrah, or will this deal prove the swan song of his dreams of recreating his former firm's dominance of the cable market?

It'll be interesting to find out.

Sources: Reuters, Charter Communications [press release], Time Warner Cable [press release]





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