Charter Communications (NASDAQ: CHTR) might end up with a piece of Time Warner Cable (TWC) after all – but it will have to turn itself inside out to do it. Having had its host takeover bid for TWC thwarted when the cable MSO agreed to merge with Comcast Corp. (NASDAQ: CMCSA, CMCSK; see “Time Warner Cable agrees to merge with Comcast”), Charter and Comcast have announced a complicated agreement through which the proposed Comcast/TWC combination will divest 3.9 million subscribers, 1.4 million directly to Charter and the rest into a spin-out company under the partial ownership of a newly created Charter holding company.
Comcast had promised to divest enough subscribers from the post-merger company to leave it with less than 30% of the nation’s MVPD customers. The promise is designed to allay anti-competitive concerns that could prevent the merger from receiving the necessary approvals. The creation of a new cable operator via the spin-out is aimed at achieving the same goal.
The agreement with Charter has four major parts:
- Comcast will divest Time Warner Cable systems that serve approximately 1.4 million existing Time Warner Cable customers directly to Charter for an unspecified amount of cash. The deal would make Charter the second largest cable MSO in the U.S. Charter says it expects to fund the purchase with proceeds from debt, leaving it with an approximately 5X debt-to-EBITDA leverage ratio at closing.
- Comcast and Charter will swap assets that serve approximately 1.6 million existing Time Warner Cable customers and 1.6 million Charter customers. The companies say the swap will improve their respective geographic presences and improve efficiencies, technology deployment, and customer service.
- Comcast will form and spin off to its shareholders a new, independent, publicly traded cable operator that will serve approximately 2.5 million existing Comcast customers. Comcast shareholders, including the former Time Warner Cable shareholders, would own approximately 67% of the spin-off.
- Charter, through a tax-free reorganization, will form a new holding company that will own 100% of Charter, and acquire the remaining 33% of the spin-off.
The new company’s nine-member board of directors will include six independent directors and three directors designated by Charter. Comcast will not be associated with the spin-out in any way, it asserts. The transfer of systems, asset purchase, and spin-out acquisition will be valued at a 7.125X 2014 EBITDA multiple, as defined by the parties involved. Charter will make additional payments to Comcast over time as tax benefits from the asset sale are realized.
The boards of Comcast and Charter have approved the deal; TWC’s board also has consented to the agreement.
The companies note the various 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, and Charter shareholder approval, among others.
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