Charter Deal for Bright House Depends on Comcast-Time Warner Merger

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Charter Communications Inc. (NASDAQ: CHTR), the nation’s fourth-largest cable operator, announced Tuesday that it has agreed to acquire Bright House Networks, the sixth-largest U.S. cable operator, for $10.4 billion in cash and stock. Among other things, the acquisition is subject to a successful closing of Charter’s previously announced transactions with Comcast Corp. (NASDAQ: CMCSA).

Charter and its subsidiary CCH I will form a new company, called “New Charter” for now, that will own 73.7% of a partnership with Advance/Newhouse, the current parent of Bright House. New Charter will pay $2 billion in cash, together with common and convertible preferred units in the partnership. The partnership units owned by Advance/Newhouse will be exchangeable for common shares of New Charter.

Tuesday’s announcement provides more details of the deal:

New Charter will contribute 100% of its assets into the Partnership, and Advance/Newhouse will contribute 100% of Bright House’s assets into the Partnership. In exchange for its contribution, Advance/Newhouse will receive $5.9 billion of exchangeable common partnership units, and $2.5 billion of convertible preferred partnership units which will pay a 6% coupon. The common and convertible preferred partnership units are each exchangeable into New Charter Class A common stock, with 34.3 million common units priced at $173.00 (the “Reference Price”) per share.

Liberty Broadband Corp. (NASDAQ: LBRDA), currently Charter’s largest shareholder, has also agreed to purchase some $700 million worth of New Charter shares at the reference price upon closing of the deal between Charter and Advance/Newhouse. Liberty will be able to maintain an equity interest of at least 19.01% in New Charter, and Advance/Newhouse will grant Liberty a five-year proxy to vote up to 6% of New Charter shares held by Advance/Newhouse, giving Liberty 25.01% of the voting power in New Charter.

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It all depends on the outcome of the proposed merger between Comcast and Time Warner Cable (NYSE: TWC). The two companies now say they expect the deal to close by the middle of this year, following a decision by the Federal Communications Commission (FCC) earlier this month to take more time reviewing comments on the merger. The agency has requested millions of pages of comments from both parties and their competitors. The Department of Justice must also approve the merger.

Shares of Charter Communications traded at $196.79 in the noon hour Tuesday, after posting a new 52-week high of $199.00. The stock’s 52-week low is $116.78, and the consensus price target is $192.63.