Comcast Corp. agreed to acquire Time Warner Cable Inc. for $45.2 billion, combining the two largest U.S. cable companies in an all-stock transaction.
Investors of New York-based Time Warner Cable will receive 2.875 new Comcast stock for each of their shares, the companies said in a joint statement today. Based on Philadelphia-based Comcast’s closing price yesterday, the deal values each Time Warner Cable share at $158.82, or about 17 percent more than last close.
In German trading, Time Warner Cable jumped 13 percent to the equivalent of $153.29 at 12:12 p.m. in Frankfurt.
Comcast Chief Executive Officer Brian Roberts will extend his lead in the U.S. cable-TV market after trouncing John Malone-backed Charter Communications Inc., which had courted Time Warner Cable since June. 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 since the end of May.
“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 number-two,” Richard Greenfield, an analyst with BTIG LLC, said by e-mail. “This is a game changer for Comcast.”
Time Warner Cable advanced 0.3 percent yesterday to close at $135.31 in New York. The company has 277.9 million shares outstanding, giving it a market value of $37.6 billion, data compiled by Bloomberg show. Comcast added 0.4 percent to $55.24.
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 will volunteer to divest about 3 million subscribers of the combined company to keep its market share below 30 percent and is willing to sell them to Charter, another person said.
Stamford, Connecticut-based Charter may still have a chance to make a final offer if the agreement with Comcast calls for Time Warner Cable to pay a breakup fee should the deal fall through, one 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 company said in a statement.
Buying the second-largest U.S cable-TV company brings Comcast more than 11 million residential subscribers. It also gives Comcast access to the New York City cable market and brings it more bargaining power with content providers, Bill Smead, chief investment officer at Smead Capital Management, said in an e-mailed reply to questions.
“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.
The Comcast-Time Warner 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, including Time Warner Cable’s Los Angeles regional sports networks, beyond the New England, North Carolina and New York systems initially offered, one of the people said. It also wanted a say in how Charter handled its proxy fight with Time Warner Cable, the person said.
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 Chief Executive Officer 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.
“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, Craig Moffett, an analyst at MoffettNathanson LLC, said in an interview in January. The merged company would account for almost three-quarters of the cable industry, according to the National Cable Television Association.
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.