Comcast is promising to sell more than one million video customers to smaller cable rival Charter in order to win U.S. approval of its $45 billion bid to buy Time Warner Cable, the companies said Monday.
The divesture plan, which was expected, is part of a complex three-way deal to swap millions of other customers with Charter and create a new spinoff company in the Midwest. The deal is designed to ensure that Comcast stays below a total national cable market share of 30%.
If the merger and divestiture plan is approved by federal regulators, it would make Charter the second largest cable company in the country. Comcast, the nation's largest broadband company, has pledged to abide by the 30% cable market share cap, as it tries to win regulatory approval of the Time Warner Cable deal.
The D.C. Circuit Court of Appeals has twice thrown out an FCC cap limiting cable ownership to 30% of the pay-TV market; the most recent decision was in 2009. Although Comcast isn't bound by the cap, it voluntarily pledged to jettison more than three million subscribers to help ease approval of the deal when it was announced.
The terms of the three-way deal are complex. Charter will acquire 1.4 million Time Warner Cable subscribers, making it the second-largest cable operator in the United States. Comcast and Charter will swap 1.6 million subscribers. The post-merger Comcast will transfer 2.5 million subscribers to a new publicly traded company spun off from Comcast. Comcast shareholders will own two-thirds of the new company, with Charter owning the remaining third.
" 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," the companies said in a statement.
As part of the deal, the combined Comcast-Time Warner Cable will gain new subscribers in Los Angeles, Dallas, Atlanta, and New York. The new, still unnamed cable company will gain subscribers in Detroit, Indianapolis, Louisville, and Minneapolis.
For cable-industry pioneer John C. Malone, who is Charter's largest shareholder, acquiring more than a million new subscribers from Comcast is something of consolation prize. Malone, whose Liberty Media group owns a 27% stake in Charter, is a legendary figure in U.S. telecom and media markets. More than a decade ago, Malone made a fortune by leading efforts to consolidate the cable industry. Liberty Media made a run at Time Warner Cable late last year, but was outbid by Comcast.
Charter will pay $7.3 billion for the new subscribers as part of the deal, according to Reuters, which values the overall divestment at about $20 billion.
"As a result of these transactions, following the completion of the merger between Comcast and Time Warner Cable, Comcast's managed residential subscribers will be below 30 percent of the total MVPD subscribers in the United States," Comcast said in a statement. Charter's subscriber base will increase by 1.4 million to a total of 5.7 million, the company said.
The sale and swap has been approved by the boards of directors of both Comcast and Charter, and Time Warner Cable's board has agreed as well, the companies announced Monday morning in a statement. Comcast says it plans to spin off a new company provisionally titled "SpinCo" after the merger. The new company will have more than two million subscribers.
Comcast, the nation’s largest cable company, wants to buy Time Warner Cable in a blockbuster merger worth about $45 billion. The proposed deal is being intensely scrutinized by the U.S. government, including the Justice Department, which will address antitrust concerns, and the Federal Communications Commission, which will address public interest issues. More than two dozen state attorneys general have joined the feds in looking at the deal.