Charter Buys Bright House for $10.4 Billion Amid Fading Cable Competition

Deal is dwarfed by monolithic AT&T+DirectTV and Comcast+Time Warner Cable proposed mergers

And then there were six. On Tuesday Stamford, Conn.-based cable company Charter Communications, Inc. (CHTR) announced a bid to acquire privately-held rival Bright House Networks for $10.4B USD [1 ][2][3]. Under the deal, both the Syracuse, N.Y.-based Bright House and Charter will both be acquired by "New Charter" a new publicly traded company that will divided up among the current shareholders of Charter and the owners of Bright House.

I. Dwarfed by Rival Deals

The deal creates what is expected to be the nation's second largest cable TV company and fourth largest pay TV company. Combined, the merged company would serve approximately 5.8 million video customers. The deal values the combined firm at $31.9B USD.

The deal could see a swifter regulatory approval given its smaller scope. The U.S. Department of Justice (DOJ) and U.S. Federal Communications Commission (FCC) are currently evaluating a pair of deals that dwarf the Charter-Bright House merger by comparison.

The first is the AT&T, Inc.'s (T) $48.5B USD bid for top satellite TV firm DirectTV (DTV), a deal which was announced last May. Including debt terms, AT&T will wind up paying about $67.1B USD for the acquisition.

[image: AT&T DirecTV merger graphic] [Image Source: Wikimedia Commons; Modifications: Jason Mick DailyTech LLC]

AT&T's Uverse is tied for fifth place in the U.S. paid TV market with 5.7 million cable customers; DirectTV is the second largest pay TV provider in the U.S. with 20 million video customers. DirecTV also brings an addition 18 million satellite video customers in Latin American markets. Within the U.S., the combined company would vault to become the second largest pay TV provider, serving up a mix of cable and satellite TV offerings.

Even bigger, though, was a $45.2B USD purchase deal announced last February by Comcast Corp. (CMCSA) -- America's largest cable and pay TV company -- to buy Time Warner Cable Inc. (TWC) -- America's second largest cable and fourth largest pay TV (including satellite) company. That deal would create a cable TV juggernaut with 31.4 million pay TV customers in the U.S. The combined entity would also control much of the high speed metropolitan internet networks in the U.S.

Both companies (but particularly Comcast ) have a reputation for poor customer service and other abusessuch as throttling internet connections to give customers slower speeds than they paid for. Both also have a long history of trying to buy influence with politicians to kill small competitors.

Given the serious antitrust issues of the two largest companies in the cable TV space merging, the deal has faced considerable resistance from consumer advocacy groups and state officials. Consumer polls have also revealed 50+ percent of consumers felt the deal was bad for them, while only about 20+ percent had a positive opinion of the merger. However with Comcast and Time Warner Cable both donating heavily to push the deal through, it stands a fair chance of passing.

Charter is tied up in that deal as well. Steered by billionaire telecom mogul John Malone, whose Liberty Media Corp. (LMCA)(LMCB)(LMCK) subsidiary Liberty Broadband bought a 27.3 percent stake in Charter in Mar. 2013, Charter offered as much as $37.3B USD (or $61B USD including debt) in a series of three bids for Time Warner Cable, the last of which came in Jan. 2014. Ultimately outbid by Comcast, Charter and its partial owner (Malone's Liberty Media) initially announced their bitter opposition to the Comcast/Time Warner Cable deal.

[image: John Malone] Charter's biggest shareholder, billionaire media tycoon John Malone's Liberty Broadband has been hunting for an acquisition target. In 2014 after being rebufffed by Time Warner in three bids, he explored an acquisition of Cox, but the deal didn't come to fruition. 

But there was a twist.

Comcast deftly offered up a set of concessions to Charter. Charter could buy 1.4 million of Comcast current customers and trade 1.6 million customers with Time Warner Cable (to get a more dominant position in certain markets). It would also spin off 2.5 million of its customers into a new company which would be 66 percent owned by Comcast and 33 percent owned by Charter. In return Charter would pay the merged Comcast-Time Warner Cable $7.3B USD (~$5,200 USD per customer, or ~$3,300 per customer if you consider the stake in the spinoff).

Charter agreed to the deal and dropped its opposition to the merger. That shift could be key to Comcast securing approval for its purchase.

II. Who Gets What in the Deal

From a regulatory perspective, the Charter-Bright House merger is viewed as much less of a threat to competition than the AT&T/DirecTV and Comcast/Time Warner Cable deals for one simple reason -- it's much smaller. Even consumer advocacy groups are more receptive to the deal.

John Bergmayer, a senior staff attorney at consumer advocacy nonprofit Public Knowledge, said that the deal was only really a potential threat to competition in that it marks a continuation of the industry wide trend of consolidating. He tells the Associated Press:

*[The deal is] kind of small in the scheme of things. Trends in consolidation are always worrying but this deal by itself is not as bad as some other deals out there.*

So far there's been no apparent opposition to the deal formally announced. If that lack of concern stands, the deal could close relatively quickly within a matter of months.

Bright House Networks is privately held by Advance/Newhouse, a subsidiary of Advance Publications, Inc. Advance Publications is a family-owned media business who is best known for its newspaper holdings. [image: Advance Publications] Founded in 1922 in Bayonne, New Jersey, Newhouse family patriarch Samuel Irving Newhouse, Sr. grew the business rapidly through a series of acquisitions stretching from the 1920s through the 1970s. The business went from owning a single struggling small town newspaper to owning over a dozen major newspapers in the northeast.

Advance Publications also owns a 33 percent stake in notorious cable television company Discovery Communications, Inc. (DISCA)(DISCB)(DISCK). It also fully owns the Condé Nast family of magazines and websites, including Reddit, Wired, and ArsTechnica.

Bright House Networks was founded out of a collaboration of Time Warner Entertainment and Advanced Publications, both of which were rapidly buying up small cable networks in the 90s. Founded in 1994, in 2003 the company was effectively split by equity, with Advance Publications keeping the Bright House brand. [image: Bright House Networks] Market research firm MoffettNathanson LLC principal analyst, Craig Moffet, noted to the Associated Press that Bright House Networks has "a strong reputation for service and customer satisfaction," something he said was a rarity in the cable TV business.

Under the proposed deal, Advance Publications (and its owners, the Newhouse family) would get $2B USD in cash, plus 26.3 percent in shares of the diluted company -- a stake valued at $8.4B USD.

Charter Communications shareholders would get the remaining 73.7 percent of New Charter shares, or roughly three quarters of the combined company. However, only $5.9B USD of that is in current tradeable shares. The rest ($2.5B USD) is in convertable special share units, which would be at a 40 percent premium over the assigned current share price of $173 USD. [image: Charter logo] On paper that would initially give Charter's largest shareholder Malone's Liberty Broadband, a stake of 14.1 percent of shares. But Malone -- a key proponent of the deal -- also gets a couple of special terms. First, he gets to dilute the share pool a bit by buying $700M USD in newly issued stock at $173 USD per share, and can buy additional shares in the future such that he maintains a 19.01 percent stake in New Charter. For five years Malone will also get to use some of Advance Publications' shares (6 percent) such that he gets up to a 25.01 percent stake in shareholder voting -- or a little over a quarter of votes.

Consequently he'll get to assign three members of the new 13 member board of directors at New Charter. Three directors will be designated by Advanced Publications and the remaining seven directors will be picked by the smaller shareholders of Charter Communications.

III. The Aftermath if All Three Deals Clear

Assuming this and the other two pending merger proposals clear regulatory hurdles, there would be only six pay TV operators with more than 3 million U.S. customers. Aside from three merged firms, the other three modestly big cable providers would be:

  • #3 DISH Network Corp. (DISH) (#2 in satellite TV)
    • 14.0 million video subscribers
  • #5 Verizon Communications Inc. (VZ) FiOS (#3 in cable TV)
    • 5.7 million video subscribers
  • #6 Cox Communications (subsidiary of family-owned Cox Enterprises) (#4 in cable TV)
    • 4.6 million video subscribers
    • Was nearly bought by Charter, according to reports, in early 2014 after being pursued by Malone.

[image: Telecom Mergers -- before and after] [Image Source: Jason Mick/DailyTech LLC]

There would also be four firms with 1-3 million customers:

  • Cablevision Systems Corp. (CVC) (cable)
    • 2.9 million video subscribers 
  • New Entrant (Comcast/Charter coowned)
    • 2.5 million video subscribers
  • Suddenlink Communications (privately held by investment firm Cequel) (cable)
    • 1.2 million video subscribers
  • Mediacom (owned by Rocco B. Commisso)
    • 1.2 million video subscribers

(Wide Open West, aka "WOW!", just misses this list with around 800-900K pay TV subscribers.)

Further that list is a bit deceptive in terms of competitiveness, in the sense that it doesn't take into account geography. Due to the government regulations and financial barriers to laying down cable in new markets, many U.S. markets have only 1 or 2 pay TV providers regionally. And with the mergers the number of local competitors could shrink.

Bright House Networks, for example, operates in markets in five states -- Florida (Tampa and Orlando), Alabama, Indiana, Michigan, and California. Charter operates in 29 states across the country. While it's not in Florida or Indiana, it does operate in three other states Bright House Networks serves. In fact, Michigan and California are two of Charter's largest service networks. And the new customers coming in from Comcast would be in Indiana where Bright House currently operates, leaving Florida as the only state in Bright House Networks' current footprint without overlap.

Similar overlap can be seen in the DirecTV/AT&T Uverse deal and the Comcast/Time Warner Cable deal. Service providers view this overlap opportunistically as "synergy", but to the consumer it represents an undeniable reduction of choice in the market.

Overall there's a familiar claim that pay TV -- both satellite and cable -- is dwindling in subscriptions. Typically that narrative is used to argue that the reduce competition is less of a concern. However, the numbers show mixed evidence supporting and questioning that claim. Even in the age of internet video and "cable cutters", the only certainty is that pay TV is currently a big business in the U.S. and will remain so for the forseeable future. And in the U.S. that big business is getting progressively less and less competitive.

Sources: Charter Communications [press release], Bright House [press release], Liberty Broadband [press release], AP News