Charter, Comcast Reach Subscriber Deal -- 3rd Update

By Ben Fox Rubin 

Comcast Corp. and Charter Communications Inc. reached a deal for Comcast to divest itself of 3.9 million subscribers, in a move aimed at helping it smooth over regulatory concerns involving its $45 billion deal for Time Warner Cable Inc.

As part of the agreement, Comcast will sell 1.4 million existing Time Warner Cable customers directly to Charter for an estimated $7.3 billion in cash.

Additionally, Comcast plans to spin off a new, publicly traded company that will serve another 2.5 million existing Comcast customers. Comcast shareholders would own 67% of that new company, while Charter will receive 33%. As part of the deal, Charter will be free to buy the new company outright in four years. The two cable operators estimated the new company would have an enterprise value of $14.3 billion.

The agreements are contingent on the Comcast-Time Warner Cable merger being completed.

Charter and Comcast also plan to swap another 1.6 million Time Warner Cable customers and 1.6 million Charter customers in a like-kind exchange, which the companies said will improve their geographic footprints. Included in the swaps are Charter's Los Angeles and New York-area systems. By gaining these systems through the swaps, Comcast, assuming it completes the TWC acquisition, would dominate the biggest TV markets of New York and Los Angeles.

To alleviate regulatory concerns over its TWC purchase, Comcast had said it would divest about three million subscribers. The divestitures announced on Monday are bigger in scale and would reduce Comcast's number of managed residential customers to less than 30% of the pay-TV market.

"Today's agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable," Comcast CEO Brian Roberts said.

In a sign of the pushback that the Comcast-TWC merger is facing, Univision Communications CEO Randy Falco publicly expressed concerns on Monday about the implications of the deal for Hispanic audiences. Combined with Time Warner Cable, Comcast "will be the top TV distributor in 19 out of the top 20 Hispanic markets," which he said gives the company "staggering influence over Hispanic consumers." Comcast's NBCUniversal owns Telemundo, one of Univision's main rivals in the Spanish-language television business.

Mr. Falco said Comcast was the only major pay-TV operator to not distribute Univision's sports network. "Either Comcast doesn't understand that soccer is a passion point for Hispanics or they don't support competitors who have competing services," he said.

For Charter, the deals are something of a consolation prize after its monthslong pursuit of Time Warner Cable was trumped by Comcast's agreement in February to buy TWC. Charter, whose biggest shareholder is John Malone's Liberty Media Corp., had sought control of TWC as part of a growth strategy aimed at consolidating the cable industry.

With this deal, Charter will move up in the ranks to the second-largest cable operator in the U.S., compared with its current status as the fourth-largest U.S. cable operator, behind Comcast, Time Warner Cable and Cox Communications Inc. Charter said Monday that, following the deals, it will have an estimated 5.7 million video customers and manage another 2.5 million through its agreement with the new company. That gives it a total of 8.2 million video customers, or nearly double its current total.

Charter will oversee technology and programming relationships on behalf of the new company, giving Charter increased scale in buying power. Charter Chief Executive Tom Rutledge will be chairman of the new company.

Charter has agreed not to purchase any shares of the new company for at least two years or acquire more than a 49% stake in the two following years. After four years, Charter could buy the company outright, though other material events could lift its restrictions sooner, according to a regulatory filing outlining the terms.

While Charter's operations are now spread across a large part of the U.S. Mr. Rutledge said on a conference call with analysts Monday that the deals will result in Charter having a stronger presence in the Midwest and Southeast.

The company will acquire systems in Ohio, Kentucky, Wisconsin, Indiana and Alabama, while divesting itself of systems in California, New England, Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia. Meanwhile, the new company will own systems that are near Charter systems in Michigan, Minnesota, Indiana, Alabama, Eastern Tennessee, Kentucky and Wisconsin.

Separately, Charter on Monday reported a first-quarter loss of $37 million, or 35 cents a share, narrowing from a year earlier loss of $42 million, or 42 cents a share.

Revenue jumped 15% to $2.2 billion, helped by the July acquisition of Cablevision Systems Corp.'s Bresnan Broadband. Video and Internet revenue grew, though voice revenue declined.

Charter found success recently in its effort to slow its video-subscriber losses by focusing on speeding up its broadband speeds and adding more high-definition TV channels. The company gained 18,000 customers in the latest period, compared with losing 25,000 a year ago.

Charter also added 136,000 Internet customers in the first quarter, compared with 107,000 a year ago.

Shalini Ramachandran contributed to this article.

Write to Ben Fox Rubin at [e-mail]

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