Time Warner Cable agrees to merge with Comcast

Faced with a hostile takeover bid from Charter Communications, Inc. (NASDAQ: CHTR), Time Warner Cable (NYSE: TWC) has agreed to merge with fellow cable MSO Comcast Corp. (NASDAQ: CMCSA, CMCSK) in an all-stock transaction worth $45.2 billion.

The boards of directors of both companies have approved the transaction. It remains to be seen whether the companies will get the necessary regulatory approvals, given the large size of the resultant entity, which would be the largest cable MSO in the United States by a significant margin. Time Warner Cable owns cable systems in such areas as New York City, Southern California, Texas, the Carolinas, Ohio, and Wisconsin. It also operates more than 30,000 Wi-Fi hotspots, primarily in Los Angeles and New York City.

The companies immediately went on the offensive in this area, describing the transaction as generating “pro-consumer and pro-competitive benefits.” These would include accelerated deployment of new services. Comcast also pledged to divest systems serving approximately 3 million managed subscribers. With Time Warner Cable bringing with it 11 million managed subscribers, Comcast would net about 8 million new subscribers if the deal is consummated. Comcast asserted that divesting the 3 million subscribers would leave its share of managed subscribers below 30% of the total number of MVPD subscribers in the U.S. – essentially equivalent to its market share after its acquisitions of AT&T Broadband subscribers in 2002 and Adelphia in 2006. Comcast claimed 53.1 million video, high-speed Internet, and voice customers as of December 31, 2013.

“The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders,” said Brian L. Roberts, chairman and CEO of Comcast Corp. “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 combination creates a company that delivers maximum value for our shareholders, enormous opportunities for our employees and a superior experience for our customers,” said Robert D. Marcus, chairman and CEO of Time Warner Cable. “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.”

Smit, current president and CEO of Comcast Cable and executive vice president of Comcast Corp., would head the merged entity.

The merger agreement, which the companies hope will close by the end of the year, calls for Comcast to acquire all of Time Warner Cable’s 284.9 million shares outstanding for shares of CMCSA. Each Time Warner Cable share would be exchanged for 2.875 shares of CMCSA. As a result, Time Warner Cable shareholders would own approximately 23% of Comcast’s common stock. Comcast shares closed yesterday at $158.82 per share. Comcast expects the transaction will generate approximately $1.5 billion in operating efficiencies and will be accretive to its free cash flow per share while preserving balance sheet strength. The merger will also be tax free to Time Warner Cable shareholders.

Word of the deal leaked late yesterday, the day after Charter announced it was putting up its own slate of board of director candidates for Time Warner Cable as part of a hostile takeover bid.

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