Charter Communications Inc. has struck a $55 billion cash-and-stock deal for Time Warner Cable Inc., giving cable mogul John Malone the prize he has been chasing for two years.
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The offer is valued at about $195 a share, a 14% premium to Time Warner Cable's last closing price. Including debt, the deal is valued at $78.7 billion.
Shares of Charter gained 3.2% to $181 in premarket trading, while Time Warner's shares gained 11.3% to $190.50 a share.
The acquisition by Charter, which is backed by Mr. Malone's Liberty Broadband Corp., would vault the cable operator into the ranks of the biggest U.S. broadband and pay-television companies.
The deal comes only a month after Time Warner Cable went back on the block after Comcast terminated the companies' planned $45.2 billion merger in the face of serious pushback from Washington regulators. A Charter-TWC deal could be in for a stringent review in Washington as well, some analysts have said.
As part of the transaction, Charter will also merge with small operator Bright House Networks. The combined cable giant would have 23 million total customers, second only to Comcast's 27 million among cable operators.
Charter, which has 5.9 million residential subscribers in more than 25 states, and Mr. Malone are betting that increased scale will help the company navigate the industry's choppy waters. Operators must contend with the onset of cable "cord-cutting" as frustrated consumers drop connections, the rise of streaming-video competitors from Netflix Inc. to Apple Inc. and expected fights with TV-channel owners over which networks are worth keeping in a bundle.
"No one has ever had a better sense of the multichannel world than John" Malone, said Leo Hindery, a veteran cable-industry executive who is managing partner at the private-equity firm InterMedia Partners. "Obviously he sees in Charter and Time Warner Cable a way to perpetuate a legacy that is unrivaled."
In 2013, Charter made multiple offers to buy Time Warner Cable but was rebuffed. Its efforts culminated in a hostile bid early last year that was headed off when Comcast struck its ill-fated TWC deal.
This time, Charter took a more light-handed approach. Mr. Malone got more involved, people familiar with the matter say, calling Time Warner Cable Chief Executive Rob Marcus in the early stages of Charter's pursuit to indicate he wanted a friendly deal. Charter's camp made a point of not submitting a lowball bid that would put off Time Warner Cable, the people said.
Time Warner Cable shareholders can choose $100 a share in cash and about $95 in Charter stock, or $115 in cash and the remainder in stock. The price tag represents a 14% premium to Time Warner Cable's closing price of $171.18 on Friday.
If regulators block the deal, Charter could owe Time Warner Cable about $2 billion, or Time Warner Cable could be responsible for the breakup fee if it accepts an offer from a rival suitor, a person familiar with the matter said. Comcast's deal with Time Warner Cable had no breakup fee.
The backlash to Comcast's bid for Time Warner Cable at the Federal Communications Commission and Justice Department left many cable executives and investors wondering whether any transformational cable-industry deal could withstand regulatory review.
FCC Chairman Tom Wheeler called cable executives including Time Warner Cable's Mr. Marcus and Charter CEO Tom Rutledge in recent days to convey that they shouldn't assume the agency is against any and all future deals just because of what happened with Comcast, according to a person familiar with the matter.
Liberty will help fund the deal by buying $5 billion of new Charter shares, and Mr. Malone's stake in the combined entity will fall below 25%.
Mr. Malone will be joined as a significant shareholder by the Newhouse family. When Charter originally agreed to buy Bright House before the Time Warner Cable deal was reached, the transaction would have given the Newhouse family, which controls Bright House owner Advance/Newhouse, a larger equity stake than Mr. Malone but a smaller voting stake.
Liberty will probably still retain a larger voting stake in the agreement for the bigger entity, said Craig Moffett, an analyst with MoffettNathanson.
For Mr. Malone, the deal would mark his return as a force to be reckoned with in U.S. cable, putting him in a position to influence how the industry transitions into a media world dominated by streaming video and broadband. Since taking a big stake in Charter in early 2013, he has been preaching the gospel of consolidation to investors, emphasizing how cable operators aren't collaborating the way they used to in the early days of the industry and are therefore missing out on opportunities to fight back against Netflix and other competitive threats. The 74-year-old was a formative figure in the early days of the cable industry. He took over debt-ridden Tele-Communications Inc. in his early 30s, guiding it through a period of uncertainty and through hundreds of acquisitions in the 1970s and 1980s that made it the largest U.S. cable-TV operator.
In 1998, he sold TCI at its height for $48 billion to AT&T and turned his attention to investments in Europe.
AT&T later sold its cable assets to Comcast.
Along the way, Mr. Malone developed a reputation for ruthless negotiating with lenders and TV programmers--former U.S. senator Al Gore labeled him "Darth Vader." He tangled with lawmakers in congressional hearings over rising rates and customer-service complaints. He also fought with municipalities over the renewal of "franchises" allowing TCI to offer service, sometimes taking them to court.
But at pivotal moments for the cable industry--such as when the government enacted laws governing the business in 1984 and 1992 and when broadcasters and cable channels began demanding a slice of monthly fees--he was also viewed as a leader and champion for cable operators' interests.
The cable-TV market that Mr. Malone and others raced to build at a breakneck pace is now fully mature--and it has actually begun to contract. Consumers frustrated by rising cable-TV prices are dropping service in favor of relatively inexpensive streaming-video services.
Now, Mr. Malone will be tested at another crucial moment for cable. The new colossus formed by the merger of Charter and Time Warner Cable would be far bigger than TCI's 11 million subscribers and would face very different challenges.
"There are lots of challenges this time around but there is no better visionary to address them," said Mr. Hindery, who ran TCI for Mr. Malone for many years.
To be successful in the coming years, cable operators will need to lean heavily on their broadband businesses to generate profit growth while limiting shrinkage in their TV business. That means investing in broadband infrastructure, streaming video services and other technologies.
For Time Warner Cable, the pact with Charter continues a wild ride over the past two years. The company was struggling last year with video-subscriber losses and other problems, and Comcast's $45.2 billion buyout looked like a good exit for shareholders. Then the surprising turn of events in Washington left the company in the lurch--only to result in what looks like another deal in short order.
A combined Comcast-TWC would have served about 35 million residential and business Internet customers. It also would have had at least 57% of the market for broadband Internet service, defined by the FCC as speeds of 25 megabits a second and higher. A Charter-TWC-Bright House combination would serve nearly 20 million residential and business Internet customers.
Before a deal was struck, competition threatened to once again derail the plans of Charter and Mr. Malone: European telecommunications group Altice SA, backed by French cable baron Patrick Drahi, was in hot pursuit of Time Warner Cable in recent days. Mr. Drahi met with Mr. Marcus on May 20 to discuss a potential cash-and-stock deal, The Wall Street Journal reported.
Now that Charter and Time Warner Cable have agreed to a price as high as $195 a share, Altice doesn't plan to submit a higher offer, according to people familiar with the matter.
For Altice, a deal the size of TWC would have been a bold move just days after the company surprised investors with its agreement to buy a 70% stake in U.S. midsize cable operator Suddenlink in a deal valued at $9.1 billion including debt.