Comcast Offers to Shed Customers to Get OK for TWC Merger

By Liana B. Baker
and Soham Chatterjee

Comcast offered to sell 1.4 million pay TV subscribers to Charter Communications for $7.3 billion as part of a transaction aimed at winning regulatory approval for its proposed $45 billion takeover of Time Warner Cable.

Comcast (CMCSA) also said it would divest another 2.5 million subscribers into a new publicly traded company, dubbed SpinCo for now, to be one-third owned by Charter (CHTR) and two-thirds by Comcast shareholders.

The deal would make Charter -- whose own bid for Time Warner Cable (TWC) was thwarted by Comcast's higher offer -- the second-biggest U.S. pay TV company with 5.7 million customers, overtaking Cox Communications.

Charter's shares rose as much as 10 percent to $142.70 in early trading Monday. Comcast shares were up 1.4 percent at $51.70.

Comcast would have less than 30 percent of the U.S. residential cable or satellite TV market after the deal, the company said in a statement.

The agreement is contingent on Comcast's Time Warner Cable deal being approved by the Justice Department and the U.S. Federal Communications Commission, a process that could take many months.

%VIRTUAL-article-sponsoredlinks%Analysts said the deal was a pre-emptive move by Comcast ahead of a review of the deal by regulators.

"Comcast wanted to do this deal now with Charter so it could get in front of regulators at the Justice Department and the FCC at the same time as the Time Warner Cable deal," a source familiar with the matter said.

The source said there was a standstill agreement with Charter stipulating that it can't gain full control of SpinCo for four years. Comcast will have no ownership in SpinCo.

SpinCo would have an estimated enterprise value of $14.3 billion and an equity value of $5.8 billion, Charter and Comcast said in an investor presentation.

The divestments, mostly in the U.S. Midwest, would deliver about $19.5 billion in value to Comcast shareholders, the companies said.

"For Charter, this deal is a transformative event and sets them up over time to consolidate the balance of the rest of the cable industry," Pivotal Research Group analyst Jeff Wlodarczak told Reuters, adding that the deal was good for both parties.

More Clout for John Malone

Charter's deal with Comcast marks an acceleration of John Malone's effective return to cable through his investment vehicle Liberty Media (LMCA), which owns about 27 percent of Charter, Wlodarczak said.

Liberty Media got involved in working with Comcast but Charter did the nuts and bolts of the deal, the source said.

Cable pioneer Malone, who set up the largest cable operator in the U.S. before selling it to AT&T (T) in 1999, returned to the U.S. cable market with Liberty's investment in Charter in March 2013.

In addition to the divestments, Charter and Comcast will swap about 1.6 million customers.

Charter will get the Detroit and Minneapolis-St. Paul markets, the companies said in the presentation.

Comcast will get parts of the Los Angeles, New York state, western Massachusetts, North and South Carolina and parts of Texas and Georgia markets.

Time Warner Cable had 11.2 million residential video subscribers as of March 31, while Comcast had 22.6 million.

Charter, which also reported better-than-expected first-quarter revenue, said it expected to fund the purchase of 1.4 million customers through debt.

Time Warner Cable shares were up 1 percent at $141.01.

-Additional reporting by Abhirup Roy and Sruthi Ramakrishnan in Bangalore.