Comcast Agrees to Shed 3.9 Million Subscribers to Land TWC Approval

The transaction would grow Charter’s customer count to 5.7 million from 4.4 million, Comcast executives said Monday on a conference call. The plan upholds Comcast’s offer to divest about 3 million subscribers if its Time Warner Cable takeover is approved (CED Feb 14 p3). Early critics of the Comcast/TWC deal remained skeptical of the divestiture plan with Charter and concerned that the acquisition would hurt consumer choice.

The transaction also would include a swap of about 1.6 million TWC subscribers with Comcast and Charter, which will alter each company’s cable footprint, Comcast said in a news release (http://bit.ly/1fmiaHm). As a result of the transactions and following an acquisition approval, “Comcast’s managed residential subscribers will be below 30 percent of the total MVPD [multichannel video programming distributor] subscribers in the United States, and approximately the same market share as Comcast’s subscriber base after its completion of both the 2002 AT&T Broadband transaction and the 2006 Adelphia transaction,” it said. Charter will provide management services to the spin-off company, dubbed SpinCo, Comcast said. The transactions “will significantly enhance Charter’s scale and improve both companies’ geographic footprint, driving operational efficiencies for Comcast, Charter and SpinCo,” it said. Comcast will hold no ownership interest in SpinCo, and Comcast will not have a role in managing the new company, Comcast said. The divestiture follows through on Comcast’s willingness to reduce its managed subscriber total to less than 30 percent of total national MVPD subscribers, Comcast said.

The Charter transaction “gives federal, state and local regulatory bodies early identification of our divestiture process, which we believe should be helpful in our efforts to gain approval of our Comcast/Time Warner Cable merger,” said Comcast CEO Brian Roberts. As the business moves more toward a communications suite of products for residential customers and businesses, “having these larger regional footprints is helpful and makes the products more competitive and opens up new markets,” he said during the teleconference. When SpinCo is created, Comcast shareholders will own 67 percent and Charter shareholders will own about 33 percent, he said.

"Between Charter and our equity ownership in SpinCo, we'll be the largest cable operator in 10 states,” said Charter CEO Tom Rutledge. The agreement creates a “highly efficient footprint” for Charter in the Midwest and the Southeast, he said. Charter plans to serve communities that it finds “attractive” and “where we think we can compete very well by delivering a highly valuable product set to customers and providing local service transactions effectively and a more efficient capability in the local advertising market,” he said. TWC called the announcement a “win-win.” The Charter agreement “moves us one step closer to completing our merger with Comcast,” TWC said in a statement.

The subscriber cap has a certain political appeal to it, a pay-TV attorney said. The Charter deal is likely “an attempt to spin off enough and get under that cap and make it [the merger] more palatable,” said the attorney, who doesn’t represent any of the companies. The three-prong approach is pretty common, the attorney said. These are complicated business arrangements and there are a lot of factors involved, like geography of coverage, the technology and the cable systems, the attorney said. “There’s a history to these managed systems that are owned by one cable operator.” The spin-offs are often done to create geography blocks, the lawyer added.

Comcast will characterize the plan with Charter as helpful for the regulatory process because Comcast will end up being smaller than it otherwise would have been, but there are several problems with that argument, said James Stenger, a mergers and acquisitions attorney at Chadbourne & Parke. A cable industry duopoly consisting of Comcast and Charter isn’t significantly different from a monopoly situation where Comcast is more dominant, he said. “On a national level, I'm not sure that it’s particularly effective in reducing whatever concerns Congress or the FCC might have about the structure of the cable industry.” The deal reduces competition locally and regionally, Stenger said. The purpose of the deal is to swap systems, allowing Comcast and Charter more control in their respective regions, he said. “While there may be a good reason for region clustering, you can’t argue that it increases competition on a regional or local level.” Stenger doesn’t have clients involved in the transaction.

Free Press and Writers Guild of America, West remained critical of the divestiture plan. The announcement would lead “to the creation of a three-company cable cartel,” WGAW said in a statement. “The decision of these three powerful companies to divide markets and share ownership of subscribers through a new publicly traded corporation is unprecedented and adds to the mounting evidence against the Comcast-Time Warner Cable merger.” Free Press Policy Director Matt Wood called the transaction “convoluted.” It may change the final tally of subscribers under the proposed merger, “but it can’t change the fact that this deal is a big loss for innovation and competition,” he said in a statement. “Transforming three giant companies into two behemoths gives no comfort to content providers or consumers.” The Consumers Union also bemoaned that “it’s hard to see how any of this benefits consumers or competition,” its policy counsel Delara Derakhshani said.

The move should be “a small but welcome gesture to regulators by not actually requiring any continued negotiation over this divestiture,” Guggenheim Partners analyst Paul Gallant said in a research note. For Comcast, the deal gains regulatory clarity, “allowing the FCC to proceed more expeditiously with the FCC/[Department of Justice] approval process,” Moffett Nathanson analysts said. Comcast captures new synergies, and it recoups additional cash, “which they have promised will be fodder for additional share repurchases, increasing the accretion of the deal,” they said.

The deal isn’t expected to ease the concerns of entities that are opposed or worried about Comcast’s intent to take over TWC, the pay-TV attorney said. “Any joint operations will just make the critics more unhappy because it keeps Comcast’s fingers in ‘x’ number of subscriber pots.” The Charter deal likely will extend the regulatory process and review of the Comcast/TWC deal, Stenger said. “It will provide a further opportunity for interested parties to make their views known to the FCC,” he said. Comcast will have to amend its application and Charter will have to file applications to take control of some of the TWC systems, he said.