The Comcast, Charter Communications and Time Warner Cable triangle has come full circle with today’s news that Comcast and Charter have reached an agreement that included selling off 1.4 million Time Warner Cable subscribers to Charter, swapping 1.6 million subscribers between Comcast and Charter and spinning off 2.5 subs to form a new company.

With multiple failed overtures, Charter was in hot pursuit of Time Warner Cable this year only to be beaten by Comcast’s $45 billion offer in February to buy the nation’s second largest cable operator.

Charter CEO Tom Rutledge and other company executives may have felt that Comcast pulled the rug out from under them when it swooped in to buy Time Warner Cable. Prior to Comcast’s offer, Comcast and Charter were reportedly in discussions in regards to Charter selling off some systems to Comcast if its deal to buy Time Warner Cable reached fruition.

Rumors of a subscriber divesture by Comcast to Charter have been floating around for the past few weeks. In the end, it appears as though Charter got a nice consolation prize while Comcast was able to firm up its geographical footprint and pay down its debt.

Charter Communications will pay $7.3 billion in cash for the former Time Warner Cable systems. Through that part of the deal, Charter’s video customer base will grow from 4.4 million to 5.7 million.

With the new subscribers coming into the fold, Rutledge gets to scale the company and perhaps situate itself for additional deals down the road. The swap of 1.6 million subscribes between Charter and Comcast provides tax efficiencies for both companies, and better aligns their respective footprints.

In the sale, Charter picked up systems in Ohio, Kentucky, Wisconsin, Indiana and Alabama. In the swap, Comcast will acquire systems in California, New England, Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia.

With the addition of Time Warner Cable’s systems, which is expected to close by the end of the year, and Charter’s piece of Los Angeles, Comcast will become the dominant cable operator in the Los Angeles area, which is also rich with Time Warner Cable Wi-Fi hotspots and regional sports networks. Similarly, Comcast will also add to its girth in Boston but will still compete with RCN.

Spin off

Charter and Comcast will spinoff an additional 2.5 million subscribers into a new company called “SpinCo.”  Comcast shareholders, including the former Time Warner Cable shareholders, are expected to own approximately 67 percent of SpinCo, while a new holding company formed by Charter is expected to directly own approximately 33 percent of SpinCo.

Charter is in charge of the management of SpinCo as well as the programming and technology initiatives. Charter will have three members on the board of directors along with six independent board members.

SpinCo will own systems adjacent to Charter systems in Michigan, Minnesota, Indiana, Alabama, Eastern Tennessee, Kentucky and Wisconsin.

"Charter's new customers will benefit from our philosophy of providing highly valued products, featuring enhanced on-demand, interactive video and increased broadband speeds, all in a simplified package designed to provide better value and service," said Charter President and CEO Tom Rutledge. "The transactions announced today will provide Charter with greater scale, growth opportunities and improved geographical rationalization of our cable systems, which in turn will drive value for shareholders and more effective customer service. And through our meaningful ownership in and board representation at SpinCo, we can help it achieve similar market share growth in the markets it serves."

With the various transactions, Comcast will own less than 30 percent of homes that subscribe to cable or satellite TV in the U.S. after its combination with Time Warner Cable closes, which may appease some of the opponents of that deal.

"Today's agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable," said Comcast CEO and Chairman Brian Roberts.  "These transactions enable us to deliver meaningful value to our shareholders. 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. We look forward to working with the management teams at Time Warner Cable, Charter and the new entity to close these transactions and ensure a smooth transition for the customers and employees of all companies."

If the deals with Charter are closed, Comcast said it would have the same market share as its subscriber base after its completion of both the 2002 AT&T Broadband transaction and the 2006 Adelphia transaction

By announcing the Charter deals now, Comcast could have sped up the regulatory process of its Time Warner Cable transaction by alleviating some of the concerns by regulatory entities and some members of Congress.

Of course, not every one of the opponents of the Time Warner Cable deal was mollified by today’s news.

"This convoluted transaction may change the final tally of subscribers under the proposed merger, but it can't change the fact that this deal is a big loss for innovation and competition,” said Free Press policy director Matt Wood. "Cable barons have always been great at dividing up the country and refusing to compete with each other. Transforming three giant companies into two behemoths gives no comfort to content providers or consumers. Lawmakers and antitrust authorities shouldn’t be fooled either."

The agreement has been approved by the boards of both companies, and Time Warner Cable's board has consented to the agreement as required under the Comcast-Time Warner Cable merger agreement.  

The transactions are subject to a number of conditions, including the closing of the Comcast-Time Warner Cable merger, receipt of Hart-Scott-Rodino, FCC and other required regulatory approvals, Charter shareholder approval, and various other matters.

If all goes as planned, the Charter/Comcast transactions could close early next year.