By Shalini Ramachandran
The collapse of Comcast Corp.'s bid to acquire Time Warner Cable
Inc. has led to a spasm of talks in the cable industry over other
possible deals. And there is an unlikely player at the center of
the unfolding drama: the Newhouse family's Bright House Networks
LLC.
In the week since Comcast's deal fell apart, Time Warner Cable
and Charter Communications Inc. have separately been in touch with
Bright House at the highest levels to discuss an acquisition of the
company, people familiar with the talks say. The talks are
preliminary, the people said.
For Charter, the fourth-largest U.S. cable operator, acquiring
Bright House, an operator with two million customers and steady
cash flows, could be a steppingstone to go after the much larger
Time Warner Cable, people familiar with Charter's thinking
said.
Such a deal would strengthen Charter's balance sheet and
increase its borrowing capacity. Charter had announced a $10.4
billion acquisition of Bright House in March, but it was contingent
on the Comcast deal closing, so the two sides must renegotiate.
Charter and its largest shareholder Liberty Broadband Corp. have
made no secret of their interest in Time Warner Cable. Over a year
ago, Charter pursued a hostile takeover of Time Warner Cable before
Comcast entered with its offer.
One reason Time Warner Cable rejected Charter's bid last time
around was its concern about the resulting debt load on the
combined company. This time, Charter is interested in friendly
negotiations as it lays the groundwork for a potential bid, people
familiar with the company's thinking say.
For Time Warner Cable, an acquisition of Bright House would
accomplish two things: it would take away an asset that could help
Charter's deal ambitions, while making Time Warner Cable more
expensive and complex to acquire. Owning Bright House would allow
Time Warner Cable to make the case to Charter that its shareholders
deserve a richer price, people familiar with Time Warner Cable's
thinking said.
Charter's last offer for the company was valued in January 2014
at $132.50 a share. Time Warner Cable shares were trading around
$156 in early afternoon trading Thursday, after the company
reported first-quarter results. Time Warner Cable reported 205,000
net residential customer additions, a strong showing that included
the first growth in video subscribers since 2009, though profit
fell on higher expenses and revenue was below Wall Street
estimates. Charter reports earnings on Friday.
Charter and Time Warner Cable each believe they can offer a
better deal to the Newhouse family that controls Bright House. The
cable business is the biggest contributor of profit to the family's
media empire. Bright House generated $3.8 billion in revenue last
year, up 6% from 2013, and its "pro forma" Ebitda margin was 37%.
Ebitda refers to earnings before interest, taxes, depreciation and
amortization.
Part of Time Warner Cable's likely pitch to the Newhouses would
be that they would wind up the largest individual shareholder of
the combined company, with more influence than they would have
through a tie-up with Charter, one of the people familiar with Time
Warner Cable's thinking said. In Charter's March deal with Bright
House--the one contingent on the Comcast transaction closing-- John
Malone's Liberty Broadband would have emerged with the largest
voting stake of any individual shareholder at 25%. Bright House
owner Advance/Newhouse would have had its voting stake capped at
23.5% for the time being.
Charter and Advance/Newhouse agreed as part of that deal that if
Comcast-Time Warner Cable failed to close, there would be a 30-day
"good faith" period during which they could try to renegotiate
their deal, the people familiar with the matter said. Time Warner
Cable can still make its own offer to Bright House during that
period, which is ongoing.
Charter may tout its operating team and the vote of confidence
from cable pioneer Mr. Malone as a sign that it is the better
partner for the Newhouses.
Complicating Charter's pursuit is a long-standing relationship
between Time Warner Cable and the Newhouse family that dates back
to the early 1990s.
As part of that relationship, Time Warner Cable for years has
negotiated programming and technology deals for Bright House, in
return for an annual fee. Time Warner Cable also has the right of
first offer on the family's cable systems, subject to some
exceptions, and can choose to match or beat any offer Charter makes
to Bright House, people familiar with the agreement said.
Time Warner Cable CEO Rob Marcus helped draft the original
partnership agreement when he was a lawyer before joining Time
Warner Cable. The Newhouse family agreed to sell to Charter earlier
this year largely because it may have been difficult under the
proposed Comcast-Time Warner Cable deal to maintain that hugely
beneficial relationship.
The Newhouse family could choose not to sell Bright House, a
person familiar with the matter said, and continue to watch how the
takeover drama among the larger companies plays out.
Dana Mattioli contributed to this article.
Write to Shalini Ramachandran at
shalini.ramachandran@wsj.com
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