Comcast Corporation (Nasdaq: CMCSA, CMCSK) of Philadelphia, Pennsylvania and Charter Communications (NASDAQ : CHTR ) , which is based in Stamford, Connecticut today jointly announced a broad agreement between them, whereby Charter will acquire approximately 3.9 million of Comcast’s existing cable subscribers.
The driver for the deal has been Comcast’s pending US$45 billion merger agreement with Time Warner Cable, which would deliver the largest and most dominant cable supplier in the United States.
By divesting nearly 4 million subscribers with this deal, reducing its national footprint to under 30% of the country’s total number of cable subscribers, Comcast clearly hopes to improve its chances of regulatory approval for the merger.
In order to make this practicable from a tax point of view for Comcast the deal is structured in a fairly complex way, in several separate, and more or less simultaneous phases, once the Comcast Time Warner Cable merger itself is consummated, as follows:
Charter will acquire 1.4 million existing Time Warner Cable subscribers for cash, increasing their own customer base to about 5.7 million and immediately making then the country’s second largest residential and commercial cable supplier. Charter expects to pay for these with proceeds of debt, and to end up with a 5 times debt to EBITDA leverage ratio at closing.
In addition, Comcast and Charter will, separately, directly exchange with each other approximately 1.6 million existing Time Warner Cable customers for approximately 1.6 million existing customers of Charter, in a tax free exchange without cash. This will alter the geographic footprint of part of each company’s network’s subscriber base, and is supposed to lead to potential increased operating efficiencies for both parties as well.
Then, Comcast will form a new company which it will spin-off to its shareholders, including those new shareholders who will have come from the former Time Warner Cable, as a new, independent, publicly traded, company (“Spinco”) that will absorb some 2.5 million existing Comcast subscribers who will first have been folded into the new entity.
Charter itself will form a new top-level holding company through a tax free reorganization, called New Charter, that will own 100% of the existing Charter, and which will also then acquire approximately a 33% stake in Spinco. Comcast shareholders, including former Time Warner Cable shareholders, will retain an approximately 67% interest in Spinco.
As a new company SpinCo is expected to incur leverage of approximately 5 times its own estimated pro-forma EBITDA, which is normal for the cable industry, and New Charter will pay for its 33% interest in SpinCo by issuing new shares of New Charter stock from treasury, but this time to Comcast shareholders, again including former Time Warner Cable shareholders.
SpinCo’s nine-member Board of Directors will include six independent directors and three directors designated by Charter. Comcast will hold no ownership interest in SpinCo (or Charter) and will have no role in managing SpinCo.
The valuations for these transactions are to be based on a 7.125 times projected 2014 EBITDA multiple (as defined by the parties), and Charter is also committed to make certain additional payments to Comcast over time as tax benefits from the asset sale are realized.
Comcast was careful to confirm in its announcement today that the sale of 1.4 million subscribers subscribers to Charter, the exchange of a further 1.6 million subscribers with Charter and the spinoff of a further 2.5 million subscribers to its shareholders would not, in its opinion, adversely affect any of the US$1.5 billion in annual post-merger synergies that it still expects to achieve through its proposed merger with Time Warner Cable itself.
As Brian Roberts put it, “Today’s Agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable, ” adding, “These transactions enable us to deliver meaningful value to our shareholders. The realignment of key cable markets achieved in these transactions will enable Comcast to fill in our footprint and deliver operational efficiencies and technology improvements. We look forward to working with the management teams at Time Warner Cable, Charter and the new entity to close these transactions and ensure a smooth transition for the customers and employees of all companies.”
The transactions are of course still subject to a number of conditions, including the closing of the Comcast-Time Warner Cable merger, receipt of Hart-Scott-Rodino, FCC and other required regulatory approvals, Charter shareholder approval, and various other matters.