Charter buys Time Warner Cable in $55B deal

Charter Communications (CHTR) said Tuesday that it is buying Time Warner Cable (TWC) for $55.3 billion, forging ahead with its theory that broadening its presence nationally would provide the leverage it needs to fend off the challenges in the turbulent pay-TV industry.

Including Time Warner Cable's debt that Charter will assume, the deal is valued at about $79 billion.

Controlled by billionaire industry legend John Malone, Charter is making its boldest move yet to pursue a company that is much larger in revenue and market share, merely weeks after Comcast (CMCSA) failed in its bid to buy Time Warner Cable. Charter also sought to buy Time Warner Cable at a lower price last year, only to be outbid by Comcast.

Charter will pay $195.71 per share in the cash-and-stock deal — $100 of it in cash with the rest in Charter shares. The offer is based on Charter's 60-trading day volume weighted average price. Charter also will provide Time Warner Cable shareholders an option to receive $115 in cash and shares of the new company.

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Charter's pre-market shares advanced about 4%. Time Warner Cable's rose 8%.

Charter, which is based in Stamford, Conn., also confirmed it's proceeding with an earlier proposal to buy Bright House Networks, a smaller cable company, for $10.4 billion. With the three companies integrated, Charter would become the second-largest TV-and-Internet provider in the U.S., with about 24 million customer accounts in 41 states, trailing only Comcast's 27.2 million.

"With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully-featured voice products," Charter CEO Tom Rutledge said in a statement.

To fund the deal, Liberty Broadband, Malone's company that owns about 25% of Charter, plans to buy $4.3 billion of newly issued shares of the new Charter after the deal closes at about $176.95 per share.

Malone has been itching for a deal. In Time Warner Cable, he sees a company that has a sizable market share and services in key U.S. markets, including New York, Los Angeles and Dallas.

Broadening its presence nationally would theoretically empower Charter to call for better pricing for content from cable networks and broadcasters, and insist on certain digital rights for streaming and on-demand video. Pay-TV providers are hoping to retain their viability in the increasingly streaming world with compelling content, including live sports, and TV-everywhere capabilities that might discourage cord-cutting customers.

The rapid changes brought on by the changing video technology also prompted Comcast to offer $45.2 billion last year to buy Time Warner Cable. But last month, Comcast ended its pursuit after federal regulators expressed anti-trust concerns and made moves that foreshadowed their likely rejection.

Meanwhile, AT&T has an agreement to buy DirecTV for $48.5 billion, a deal that analysts expect to be approved. Last week, Altice, the Luxembourg-based telecom company controlled by billionaire Patrick Drahi, said it's entering the U.S. market by buying cable operator Suddenlink Communications for about $9.1 billion.

Charter pitched a series of escalating bids to buy Time Warner Cable during 2013 to 2014. Time Warner Cable's board rejected Charter's sweetened offer of about $61 billion in cash, stock and debt assumption in January 2014. The board characterized the offer as a "third grossly inadequate proposal," prompting Comcast to enter the bidding and trumping Charter with its offer.

Asked at an investor conference in November whether he would consider a new effort to buy Time Warner Cable if the Comcast deal were rejected, Malone replied, "Hell, yes."

Charter also may have been motivated to strike its aggressive deal by a possible competitor. While Altice's Drahi was in the U.S. to wrap up the Suddenlink deal, he met with Time Warner Cable CEO Rob Marcus for a possible merger, Bloomberg News reported last week.

In an investor note Monday, Mike McCormack, an analyst at Jefferies, wrote that Charter will have an easier time selling its merger proposal than Comcast given that the combined company would have a lower market share. That Charter doesn't own content providers also may work in its favor, he said. Comcast owns NBCUniversal and federal regulators worried that the nation's largest cable company may favor its subsidiary's content over NBC's competitors.

"We believe that this transaction will likely gain regulatory approval," McCormack said. "The combined company is still smaller than (Comcast) and there are no vertical integration issues."

Still, the deal will be face some opposition from consumers and activist groups, and uncertainties will linger. And an approval is hardly guaranteed even if their combination lacks the size of Comcast's proposal that stirred vigorous opposition. If Charter's proposal falls through, Time Warner Cable will receive $2 billion in a breakup fee.

"The Federal Communications Commission reviews every merger on its merits and determines whether it would be in the public interest," FCC Chairman Tom Wheeler said in a statement Tuesday. "In applying the public interest test, an absence of harm is not sufficient. The Commission will look to see how American consumers would benefit if the deal were to be approved."

The Bright House transaction is subject to the completion of the Time Warner Cable acquisition. The companies expect to close all the deals by the end of 2015.

Rutledge will remain CEO of the combined company and will be offered the position of chairman.

Charter also said the current owner of Bright House, Advance/Newhouse, will retain a stake equivalent to about 13% of Bright House.