Most of Indiana, including the Indianapolis area, will lose Comcast Corp. as its cable provider if the company receives approval for a new plan to ease the regulatory process for its merger with Time Warner Cable Inc.
Stamford, Conn.-based Charter Communications Inc. said Monday that it has reached an agreement to take control of 3.9 million of Comcast's customers under a plan that will create a new cable-TV company in central Indiana.
In the first step of the three-part agreement, Charter said it will buy 1.4 million Time Warner Cable customers for $7.3 billion after the merger of Comcast and Time Warner Cable closes. Charter will also form a holding company to acquire a 33-percent stake in a spinoff from Comcast that will pick up 2.5 million Comcast customers. The companies will also swap 1.6 million customers apiece.
The new holding company, now known as SpinCo, will take over 2.5 million Comcast cable customers in Indiana, covering most of the northern part of the state. According to a map released by the companies, Indianapolis and Fort Wayne will fall under the SpinCo territory.
The southern part of Indiana, including Evansville, will be taken over by Charter.
Comcast said the transition wouldn't take place until after the merger is finalized, which it hopes will occur by the end of the year.
Comcast spokesman John Demming said there have been no formal names suggested yet for SpinCo or a decision on where the company will be based.
Charter spokesman Alex Dudley said “it’s impossible to say what the new company is going to look like at this point.” But, because Charter would manage the SpinCo, there is a good chance some of the content offerings will be similar to those offered Charter customers, he said.
“I can’t say exactly what you’ll see, but the average customer is probably going to see a lot of similarities to what they have now,” he said. “Ultimately you’ll be able choose from a lot of packages that offer phone, Internet, TV, and on-demand services.”
Charter said it has a library of about 10,000 on-demand titles. Comcast has more than 35,000 through Xfinity.
The arrangement could help Philadelphia-based Comcast appease critics of the $45 billion takeover of Time Warner Cable by reducing the combined company’s market share to less than 30 percent. After Comcast thwarted Charter’s earlier attempt to acquire Time Warner Cable, Charter is also saving face with a transaction that will make it the second-largest U.S. cable operator.
“Despite what may be some lingering bad blood between Comcast and Charter, this deal illustrates that these companies can work well together to efficiently consolidate the cable-TV industry,” said Paul Sweeney, an analyst for Bloomberg Industries.
Shares of Charter rose 7.7 percent, to $140 each, Monday morning. Comcast shares were up less than 1 percent, to $51.40.
Shareholders of Comcast and the former Time Warner Cable will own 67 percent of the new spinoff, while Stamford, Conn.-based Charter will manage the entity. The spinoff is estimated to have an enterprise value of $14.3 billion and an equity value of $5.8 billion, according to slides disclosed in a regulatory filing.
There is a standstill as part of the agreement, in which Charter has agreed not to acquire any shares of the spinoff for two years and not to acquire shares that would cause it to own more than 49 percent of the spinoff for two years after that, said Alex Dudley, a spokesman for Charter.
Charter will likely buy the rest of the spinoff after the four-year period, and can do other deals in the meantime, Craig Moffett, founder of research firm MoffettNathanson LLC, said Monday.
A new publicly traded company will own all of Charter and 33 percent of the spinoff company. Charter will issue about $2.1 billion in equity to shareholders of the new spinoff.
“The transactions announced today will provide Charter with greater scale, growth opportunities and improved geographical rationalization of our cable systems, which in turn will drive value for shareholders and more effective customer service,” Charter CEO Tom Rutledge said in Monday’s statement.
Charter’s new footprint will be easier to operate and have faster growth, Rutledge said on a conference call to discuss the deal. The company will now have about 5.7 million subscribers plus the management of another 2.5 million through the spinoff company, helping it oversee a total of 8.2 million video customers. That’s almost double its previous reach.
With the asset swap, Charter will gain systems in Ohio, Kentucky, Wisconsin, Indiana and Alabama, while divesting systems in California, New England, Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia.
The spun-off company will own systems that are near Charter’s existing footprint in Michigan, Minnesota, Indiana, Alabama, Tennessee, Kentucky and Wisconsin.
“What we like about the deal is at the end of the day Charter spends less than $20 billion to double its subscribers while also dramatically improving the operational efficiencies” by clustering Charter subscribers in the same geographic areas, Richard Tullo, an analyst with Albert Fried & Co., wrote in a note Monday.
Charter CEO Rutledge will be chairman of the new spinoff, which will have nine board members, three of whom will be Charter executives.
The agreement marks the end of weeks of discussions between Charter and Comcast and puts them both on a path to reaching more subscribers after the traditional U.S. pay-TV market lost customers for the first time last year. Rutledge has envisioned expanding through acquisitions to help the cable company negotiate for better deals on programming and boost profit.
Charter also said Monday that it captured more TV customers on its own in the first quarter, according to a separate statement. Residential video customers rose by 18,000, beating the 5,000 additional TV subscribers projected by Philip Cusick, an analyst at JPMorgan Chase & Co.
Charter’s net loss narrowed to $37 million in the first quarter, or 35 cents a share, from $42 million, or 42 cents, a year ago. Sales rose to $2.2 billion, compared with the $2.18 billion analysts predicted on average.