Charter nears $70bn Time Warner Cable takeover

Time Warner Cable is nearing an agreement to be acquired by smaller peer Charter Communications for about US$55 billion (A$70 billion), in a deal that would combine the second and third largest US cable operators.

The acquisition would create a major rival to Comcast, the biggest operator in the US cable and broadband market, and marks a triumph for Charter, which was rejected by Time Warner Cable just last year.

News of a second potential merger comes as the traditional US pay television industry faces stagnating growth and new competition from over-the-web rivals offering individual services, like Netflix, or packages of channels, such as Sony. A larger company in this sector could achieve greater economies of scale, including in negotiations with programmers.

The cash-and-stock deal values Time Warner Cable at US$195 per share, according to sources, and comes just one month after Comcast dropped its US$45.2 billion merger agreement with Time Warner Cable, clinched in February 2014, over antitrust concerns.

Time Warner Cable shares closed at US$171.18 on Friday. That is up substantially from the day before the original Comcast deal was announced last year, when the shares closed at US$135.31.

A merger of Charter and Time Warner Cable, with other related deals, would eliminate one of the country's top internet providers and control more than 20 percent of the broadband market, according to data from MoffettNathanson.

The Comcast-Time Warner Cable deal rejected by regulators would have created a provider with roughly 40 percent of the US high-speed internet market.

Charter hopes its deal for Time Warner Cable will be viewed more favorably by regulators. 

One of the chief areas of concern for regulators in a merging industry is competition in internet broadband.

The deal is expected to be announced on Wednesday.

Charter will also acquire Bright House Networks, the sixth-largest US cable operator, for US$10.4 billion, sources added. The combined companies could have as many as 23 million total customers, just behind Comcast's 27.2 million customers.

Charter and Bright House had extended their merger talks after Comcast's deal with Time Warner Cable fell through. Charter's previous agreement with Bright House was contingent on Comcast's completion of the buyout of Time Warner Cable.

Media mogul John Malone, whose Liberty Broadband is Charter's largest shareholder, has advocated strongly for the deal, and Liberty is supporting the deal by acquiring US$5 billion in new Charter stock, one source said.

Charter chief executive Tom Rutledge is expected to be CEO of the combined entity.

Charter was competing for Time Warner Cable against French telecommunications group Altice SA, which last week agreed to buy US regional cable company Suddenlink Communications for US$9.1 billion from private equity investors, making its first move across the Atlantic.

The sources asked not to be identified ahead of any official announcement. Time Warner Cable declined to comment, while Charter, Bright House and Altice did not immediately respond to requests for comment.

Break-up fee

Time Warner Cable shareholders will have an option on the amount of the US$195 per share acquisition price to be paid in cash - able to take either US$100 or US$115 in cash and the balance in Charter stock, one source said.

Charter asked for deal negotiations with Time Warner Cable to be speeded up after Altice expressed interest, one source said. Altice did not have enough time to address all of Time Warner Cable's concerns over a merger between the two of them, they added.

Altice will not seek to outbid Charter for Time Warner Cable and may now consider other possibilities for acquisitions in the United States, two sources said.

Charter has agreed to pay Time Warner Cable a US$2 billion break-up fee should their deal fall through, according to one of the sources. Comcast did not have to pay a breakup fee when it ended its agreement to acquire Time Warner Cable last month.

Matthew Harrigan, an analyst with Wunderlich Securities, said he believes a Charter-Time Warner tie-up would have "a very high likelihood of passing muster with regulators" because the size of the combined company would not create the same anti-trust concerns regulators had about Comcast buying its smaller rival.

The questions, Harrigan said, were whether other bidders would emerge and how Charter shareholders will react to the offer price.

"You never know with these deals," he said. "This could morph into something different by (Wednesday) morning."