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Comcast bags Time Warner Cable in $45.2 billion stock deal

Thu, 02/13/2014 - 12:03pm
Mike Robuck

Comcast, the nation’s largest cable operator and ISP, has proposed a $45.2 billion takeover of Time Warner Cable, which is the nation’s second-largest cable operator, in a deal that will have major ramifications on the cable and broadband industries.

While the deal still needs to pass regulatory muster, Comcast will acquire all of Time Warner Cable’s 284.9 million shares, for a deal that has a stock value of about $45.2 billion.

The “friendly, stock-for-stock transaction” will result in Time Warner Cable shareholders owning approximately 23 percent of Comcast’s stock with a value of approximately $158.2 per share. The amount Comcast is paying is just below the $160 per share value that Time Warner Cable CEO Rob Marcus previously said his company was willing to take when Charter Communications made its third offer last month.

The transaction will generate approximately $1.5 billion in operating efficiencies and will be accretive to Comcast’s free cash flow per share while preserving balance sheet strength. The merger will also be tax free to Time Warner Cable shareholders.

In addition to the regulatory reviews and customary closing conditions, the deal needs to be approved by both companies’ shareholders, but both companies expect it to close by the end of the year. Comcast also has certain conditions it has to adhere to due to its acquisition of NBCUniversal.

The deal shouldn’t come as a complete surprise since Comcast was mentioned as a potential partner in regards to backing Charter’s bid for Time Warner Cable in return for key systems. Last year it was rumored that Time Warner Cable had approached Comcast about forging a deal.

If the deal goes through, Comcast will inherit Time Warner Cable’s 11 million subscribers, and valued systems in New York City, Los Angeles and Dallas. Time Warner Cable and Comcast’s footprints don’t overlap. In order to make the deal more palatable to the Federal Communications Commission and Justice Department, Comcast said it was prepared to divest systems serving approximately 3 million managed subscribers to give it 8 million former Time Warner Cable subscribers.

Once Comcast sheds the 3 million subscribers, its subscriber base will be approximately 30 million. Comcast pointed out that its share of managed subscribers would remain below 30 percent of the total number of MVPD subscribers in the U.S. and would essentially be equivalent to Comcast Cable’s subscriber share after its completion of both the 2002 AT&T Broadband transaction and the 2006 Adelphia transaction.

Comcast will acquire DukeNet Communications and Time Warner Cable's two regional sports networks in Los Angeles, its 26.8 percent stake of Sterling Entertainment Enterprises, LLC, which does business as SportsNet New York, and its 52 news and local programming channels, including Time Warner Cable News NY1 in New York City.

“The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders,” said Comcast CEO and Vhairman Brian Roberts. “In addition to creating a world-class company, this is a compelling financial and strategic transaction for our shareholders. Also, it is our intention to expand our buyback program by an additional $10 billion at the close of the transaction. We believe there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x operating cash flow. This transaction will be accretive and will yield many synergies and benefits in the years ahead.

“Rob Marcus and his team have created a pure-play cable company that, combined with Comcast, has the foundation for future growth. We are looking forward to working with his team as we bring our companies together to deliver the most innovative products and services and a superior customer experience within the highly competitive and dynamic marketplace in which we operate.”

Once the deal is completed, Comcast Cable President and CEO Neil Smit will lead the new cable company.

The deal also put a fork in Charter Communications’ ambition to acquire Time Warner Cable, which was backed by John Malone via Liberty Media’s 27 percent stake in Charter. Charter’s last offer was 132.50 per share, an offer that Time Warner Cable CEO and chairman Rob Marcus said was “grossly inadequate.”

“This combination creates a company that delivers maximum value for our shareholders, enormous opportunities for our employees and a superior experience for our customers,” Marcus said. “Comcast and Time Warner Cable have been the leaders in all of the industry’s most important innovations of the last 25 years and this merger will accelerate the pace of that innovation. Brian Roberts, Neil Smit, Michael Angelakis and the Comcast management team have built an industry-leading platform and innovative products and services, and we’re excited to be part of delivering all of the possibilities of cable’s superior broadband networks to more American consumers.”

On Tuesday, Charter announced a full slate of 13 nominees to Time Warner Cable’s board of directors.  Charter could be a player for the 3 million subscribers that Comcast plans on shedding.

“Charter has always maintained that our greatest opportunity to create value for our shareholders is by executing our current business plan, and that we will continue to be disciplined in this and any other M&A activity we pursue,” a Charter spokesman said via email.

On the technology front, Comcast would be able to offer its subscribers Start Over and Look Back, both of which have been popular with Time Warner Cable’s subscribers. On the flip side, Comcast can push its X1 platform, which recently launched a cloud-based DVR offering in Boston, into the former Time Warner Cable homes. 

Comcast has finished its all-digital conversion, which was known as “Project Cavalry,” using digital terminal adapters (DTAs) while Time Warner Cable completed a few analog-to-digital conversions last year

Both companies have been active on the TV Everywhere/app front, and with deploying Wi-Fi hotspots. Time Warner Cable and Comcast both offer their own home security and home automation services, as well as most of the same business services. Comcast’s advertising efforts will benefit from the addition of the Los Angeles, New York City and Dallas markets.

Combining Time Warner Cable and Comcast will also give the new company considerable clout when it comes to negotiating retransmission agreements.

J.P. Morgan, Paul J. Taubman, and Barclays Plc acted as financial advisors to Comcast and Davis Polk & Wardwell LLP and Willkie Farr & Gallagher LLP are its legal advisors. Morgan Stanley, Allen & Company, Citigroup and Centerview Partners are financial advisors to Time Warner Cable and its Board of Directors, and Paul, Weiss, Rifkind, Wharton & Garrison LLP and Skadden, Arps, Slate, Meagher & Flom LLP are legal advisors.

 

 

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