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Comcast to take over Time Warner Cable in $45.2B deal
February 13, 2013 By Alex Sherman

Comcast Corp. (CMCSA) agreed to acquire Time Warner (TWC) Cable Inc. for $45.2 billion in stock, a surprise deal that combines the two largest U.S. cable companies and creates a bulwark against competition from phone and satellite providers.

Time Warner Cable investors will receive 2.875 Comcast stock for each of their shares, the companies said in a joint statement today. The purchase values each Time Warner Cable share at $158.82, or 17 percent more than its closing price yesterday. The transaction, subject to approval by stockholders and regulators, is expected to be completed by the end of 2014.

In sealing the deal, Comcast Chief Executive Officer Brian Roberts trumped a bid from Charter Communications Inc. (CHTR) and its billionaire backer John Malone, who had courted Time Warner Cable for months. The merger also will help the companies cope with an industrywide decline in cable-TV viewers following years of inroads by phone and satellite companies, as well as newer Internet services such as Hulu LLC and Aereo Inc.

“This leaves Comcast as the sole king of the cable hill, with John Malone and Charter hitting a brick wall in their hopes of becoming a close No. 2,” said Richard Greenfield, an analyst with BTIG LLC. “This is a game changer for Comcast.”

In its counterproposal to Charter, Time Warner Cable had asked for $160 a share.

Holding out for a better offer than Charter’s $132.50-a-share bid allowed Time Warner Cable to deliver an almost 70 percent gain for shareholders over the past year.

Time Warner Cable’s stock jumped 7 percent to $144.81 at the close in New York, while Comcast fell 4.1 percent to $52.97. Time Warner Cable bonds also soared to a nine-month high. The company’s $1.25 billion of 4.5 percent notes due 2042 climbed 15 cents to 90.55 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Time Warner Cable shareholders will own about 23 percent of Comcast’s common stock after the transaction is completed. The deal, which doesn’t carry a breakup fee for either side, will generate savings of about $1.5 billion and increase Comcast’s free cash flow per share, according to the statement. Comcast, based in Philadelphia, also announced plans to buy back an additional $10 billion of its shares.

Offloading Customers

Charter is unlikely to match Comcast’s bid and is willing to study any assets Comcast would sell, said a person familiar with the matter, who asked not to be identified because the negotiations were private. Comcast plans to divest about 3 million subscribers of the combined company to keep its market share below 30 percent. It’s willing to sell those customers to Charter, another person said.

“Charter has always maintained that our greatest opportunity to create value for our shareholders is by executing our current business plan, and that we will continue to be disciplined in this and any other M&A activity we pursue,” the Stamford, Connecticut-based company said in a statement.

Buying the second-largest U.S cable-TV company extends Comcast’s leadership in the industry -- adding more than 11 million residential subscribers to Comcast’s 21 million video customers. It also gives Comcast access to the New York City cable market and more bargaining power with content providers, said Bill Smead, chief investment officer at Smead Capital Management.

“This is definitely a bet on a positive future for high-speed access, cable and other services in an economic recovery,” said Smead, whose fund owns Comcast shares.

Stormy Meeting

The Comcast-Time Warner Cable agreement caught Charter by surprise, people familiar with the matter said. Comcast and Charter had been negotiating an asset sale after a potential Charter acquisition of Time Warner Cable, according to the people.

Those talks broke down last week, culminating in a meeting where Comcast Chief Financial Officer Michael Angelakis stormed out and threatened to do a deal for Time Warner Cable without Charter’s help, the people said.

Comcast pressed Charter to divest more assets beyond the New England (NEN), North Carolina and New York systems initially offered, including Time Warner Cable’s Los Angeles regional sports networks, one of the people said. It also wanted a say in how Charter handled its proxy fight with Time Warner Cable, the person said.

Stock Purchase

Comcast also didn’t want to commit a lot of cash to a deal, preferring to do an all-stock transaction, which Charter disagreed with, another person said.

The Comcast acquisition values Time Warner Cable at about $69 billion including net debt, or 8.3 times its estimated 2014 earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. North American cable and satellite companies trade at an average multiple of 9 times on that basis, the data show.

In its counterproposal to Charter, Time Warner Cable had asked for $160 a share. Time Warner Cable CEO Robert Marcus would prefer to work with Comcast CEO Roberts rather than with Charter’s Malone, a person with direct knowledge of the matter said in November.

‘Ridiculous Lowball’

“The Comcast bid makes the Time Warner board look smart for telling Charter its offer was a ridiculous lowball,” said Erik Gordon, a business professor at the University of Michigan.

Comcast has made $65.6 billion of acquisitions over the past 10 years, according to data compiled by Bloomberg. It acquired the remainder of NBCUniversal from General Electric Co. for $16.7 billion in March, following through on the cable company’s purchase of a controlling stake in 2011.

A tie-up between Comcast and Time Warner Cable would face tough scrutiny from the Federal Communications Commission, according to Craig Moffett, an analyst at MoffettNathanson LLC. The merged company would account for almost three-quarters of the cable industry, data from the National Cable Television Association show. It also would be the biggest merger of the year and the largest cable deal since 2002, when Comcast acquired AT&T Broadband.

The proposed purchase, which faces as much as a year of scrutiny, probably will end in approval after regulators secure pledges the combined company won’t harm Internet users. FCC Chairman Tom Wheeler, a Democrat, may seek to protect online video providers like Netflix from excessive charges for streaming content and use the deal to extend fast Web access to more residences and schools.

“I think it gets through because it enables the Wheeler FCC to implement public policy that it might not be able to get done through rulemaking,” Rob McDowell, a former Republican commissioner, said in an interview.

Last month, Time Warner Cable announced fourth-quarter profit that beat estimates and said it will add 1 million residential customers in the next three years. It lost 217,000 residential video subscribers in the fourth quarter, hurt by competition from AT&T Inc., Verizon Communications Inc. and streaming services such as Netflix Inc. The larger Comcast added 43,000 television customers in the same period.

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