Comcast announced 4/28 a series of transactions that will lower its debt and help clear the way for merger with Time Warner Cable. These transactions include the sale of cable systems with 1.4 million subscribers to Charter and the spinoff of an additional 2.5 million subscribers into a new company, for a total of 3.9 million customers divested in the deal. The 2.5 million subscribers will be part of a new publicly traded cable provider that based Comcast is creating and spinning off.
Charter will form a new holding company that will own about a third of the Comcast spinoff, while shareholders of Comcast and the former TWC will own the remaining 67% of the new company.
The divestiture follows through on Comcast’s willingness to reduce its post-merger managed subscriber total to less than 30% of total national MVPD subscribers, while maintaining the compelling strategic and financial rationale of its proposed merger with TWC.
Pursuant to the deal and following the close of the merger, Charter will acquire approximately 1.4 million existing Time Warner Cable subscribers, increasing Charter’s current residential and commercial video customer base from 4.4 million to approximately 5.7 million, and making Charter the second largest cable operator in the US.
Here are the details:
Charter and Comcast will also each transfer approximately 1.6 million customers respectively. In addition, Charter, through a tax free reorganization, will form a new holding company (New Charter) that will own 100% of Charter, and acquire an approximate 33 percent stake in a new publicly-traded cable provider to be spun-off by Comcast serving approximately 2.5 million customers (“SpinCo”). Charter will provide management services to SpinCo. In aggregate, today’s announced transactions will significantly enhance Charter’s scale and improve both companies’ geographic footprint, driving operational efficiencies for Comcast, Charter and SpinCo.
The Agreement has been approved by the boards of both companies and Time Warner Cable’s Board has consented to the Agreement as required under the Comcast-Time Warner Cable merger agreement.
The dealwill be executed via three separate transactions:
1. Comcast will divest Time Warner Cable systems serving approximately 1.4 million existing Time Warner Cable customers directly to Charter for cash. Charter expects to fund the purchase with proceeds from debt, and to have approximately a 5 times debt to EBITDA leverage ratio at closing.
2. Comcast and Charter will transfer assets serving approximately 1.6 million existing Time Warner Cable customers and 1.6 million Charter customers in a tax-efficient like kind exchange, improving the geographic presence of both companies, leading to greater operational efficiencies, improved technology deployment and enhanced customer service.
3. Comcast will form and spin off to its shareholders a new, independent, publicly-traded company that will operate systems serving approximately 2.5 million existing Comcast customers. Comcast shareholders, including the former Time Warner Cable shareholders, are expected to own approximately 67 percent of SpinCo, while New Charter is expected to directly own approximately 33 percent of SpinCo. SpinCo expects to incur leverage of approximately 5 times estimated pro-forma EBITDA, and New Charter will then acquire its interest in SpinCo by issuing New Charter stock to Comcast shareholders (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 transfer of systems, asset purchase and SpinCo acquisition will be valued at a 7.125 X 2014 EBITDA multiple (as defined by the parties), and Charter will make additional payments to Comcast over time as tax benefits from the asset sale are realized.
Comcast has reaffirmed that, after taking into account the transactions with Charter, it continues to expect its merger with Time Warner Cable to generate approximately $1.5 billion in operating efficiencies. Comcast shareholders will receive meaningful value with shares in New Charter, as well as new shares in SpinCo. In addition, Comcast intends to use proceeds from these transactions to reduce its debt in a leverage-neutral manner and expand its share buyback program.
“Today’s Agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable,” said Brian Roberts, Comcast CEO. “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.”
“Charter’s new customers will benefit from our philosophy of providing highly valued products, featuring enhanced on-demand, interactive video and increased broadband speeds, all in a simplified package designed to provide better value and service,” said Tom Rutledge, Charter CEO. “The transactions announced today will provide Charter with greater scale, growth opportunities and improved geographical rationalization of our cable systems, which in turn will drive value for shareholders and more effective customer service. And through our meaningful ownership in and board representation at SpinCo, we can help it achieve similar market share growth in the markets it serves.”
The transactions are 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 and Charter shareholder approval.
