As per a recent Wall Street Journal report, Charter Communications, Inc. (CHTR) may receive the much-anticipated Federal Communications Commission (FCC) approval to close its planned takeover of Time Warner Cable Inc. (TWC), by this week itself.
As per people familiar with the matter, FCC Chairman Tom Wheeler is expected to circulate a draft order approving the merger. However, the order would impose certain constraints on the transaction like thwarting Charter from including clauses in pay-TV contracts that restrict a content company's ability to provide its programming online or to new players. Also, the deal will possibly include a condition for Charter to build or upgrade service to added homes.
Notably, in May 2015, Charter had reached an agreement to buy Time Warner Cable for $78.7 billion, including debt. Taking into account Time Warner Cable's outstanding diluted shares as of Mar 31, 2015, the value of the stock portion of the deal has been pegged at $55.76 billion.
Interestingly, the deal has been approved by shareholders of both the companies. Additionally, Charter’s investors have sanctioned the impending buyout of Bright House – the sixth largest U.S. cable operator – for $10.4 billion.
What’s the Fuss About?
Notably, the FCC had earlier rejected Comcast Corp.’s (CMCSA) attempt to take over Time Warner Cable as the combined entity would have controlled 35% of the U.S. pay-TV market (exceeding the FCC limit of 30% market share) and almost 60% of the high-speed broadband (Internet) market.
Though the Charter-Time Warner Cable deal has been facing close scrutiny by the FCC, the merged entity of Charter, Time Warner Cable and Bright House, once formed, will jointly serve 23.9 million customers across 41 states. The figure is duly below the highest market share limit set by the FCC.
Meanwhile, in Jul 2015, U.S. telecom behemoth AT&T, Inc. (T -) scaled up to the highest position in the U.S. pay-TV market with the acquisition of DIRECTV.
Bottom Line
If the Charter-Time Warner Cable deal materializes, it will be a win-win situation for both the companies. Time Warner Cable, together with most of the cable TV operators in the U.S., is getting marginalized gradually by fiber-based video offerings of telecom giants and online video streaming services of low-cost operators.
On the other hand, the alliance will benefit Charter in terms of geographic expansion and operating cost synergies, which in turn, will boost its bottom line and free cash flow.
We note that, the much-anticipated green signal from the FCC would duly make Charter the second-largest cable MSO (multi-service operator) in the U.S. after Comcast.
Currently, both Charter and Time Warner Cable carry a Zacks Rank #3 (Hold).
By: Zacks Equity Research.
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