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Charter and Comcast to Swap Cable Customers in Key Markets

Charter Will Form a Holding Company to Acquire a 33% Stake in a Spinoff From Comcast

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Charter Communications Inc. reached an agreement to take control of 3.9 million more cable-TV customers, helping Comcast Corp. ease the approval process for its merger with Time Warner Cable Inc.

In the first step of today's three-part agreement, Charter said it will buy 1.4 million Time Warner Cable customers for $7.3 billion after the merger of Comcast and Time Warner Cable closes. Charter will also form a holding company to acquire a 33% stake in a spinoff from Comcast that will pick up 2.5 million Comcast customers. The companies will also swap 1.6 million customers apiece.

The arrangement could help Philadelphia-based Comcast appease critics of the $45 billion takeover of Time Warner Cable by reducing the combined company's market share to less than 30 percent. After Comcast thwarted Charter's earlier attempt to acquire Time Warner Cable, Charter is also saving face with today's transaction that will make it the second-largest U.S. cable operator.

"Despite what may be some lingering bad blood between Comcast and Charter, this deal illustrates that these companies can work well together to efficiently consolidate the cable-TV industry," said Paul Sweeney, an analyst for Bloomberg Industries.

Shares of Charter rose 4.3% to $135.63 at 9:38 a.m. in New York, the highest price since February. Comcast increased 1.2% to $51.56.

Spinoff valuation
Shareholders of Comcast and the former Time Warner Cable will own 67% of the new spinoff, while Stamford, Conn.-based Charter will manage the entity. The spinoff is estimated to have an enterprise value of $14.3 billion and an equity value of $5.8 billion, according to slides disclosed in a regulatory filing.

There is a standstill as part of the agreement, in which Charter has agreed not to acquire any shares of the spinoff for two years and not to acquire shares that would cause it to own more than 49% of the spinoff for two years after that, said Alex Dudley, a spokesman for Charter.

A new publicly traded company will own all of Charter and 33% of the spinoff company. Charter will issue about $2.1 billion in equity to shareholders of the new spinoff.

"The transactions announced today will provide Charter with greater scale, growth opportunities and improved geographical rationalization of our cable systems, which in turn will drive value for shareholders and more effective customer service," Charter Chief Executive Officer Tom Rutledge said in today's statement.

Swapping markets
Charter's new footprint will be easier to operate and have faster growth, Mr. Rutledge said on a conference call today to discuss the deal. The company will now have about 5.7 million subscribers plus the management of another 2.5 million through the spinoff company, helping it oversee a total of 8.2 million video customers. That's almost double its previous reach.

With the asset swap, Charter will gain systems in Ohio, Kentucky, Wisconsin, Indiana and Alabama, while divesting systems in California, New England, Tennessee, Georgia, North Carolina, Texas, Oregon, Washington and Virginia. The spun-off company will own systems that are near Charter's existing footprint in Michigan, Minnesota, Indiana, Alabama, Tennessee, Kentucky and Wisconsin.

"What we like about the deal is at the end of the day Charter spends less than $20 billion to double its subscribers while also dramatically improving the operational efficiencies" by clustering Charter subscribers in the same geographic areas, Richard Tullo, an analyst with Albert Fried & Co., wrote in a note today.

Pay-TV's decline
Charter CEO Mr. Rutledge will be chairman of the new spinoff, which will have 9 board members, 3 of whom will be Charter executives.

Today's agreement marks the end of weeks of discussions between Charter and Comcast and puts them both on a path to reaching more subscribers after the traditional U.S. pay-TV market lost customers for the first time last year. Mr. Rutledge has envisioned expanding through acquisitions to help the cable company negotiate for better deals on programming and boost profit.

Charter also said today that it captured more TV customers on its own in the first quarter, according to a separate statement. Residential video customers rose by 18,000, beating the 5,000 additional TV subscribers projected by Philip Cusick, an analyst at JPMorgan Chase & Co.

Charter's net loss narrowed to $37 million in the first quarter, or 35 cents a share, from $42 million, or 42 cents, a year ago. Sales rose to $2.2 billion, compared with the $2.18 billion analysts predicted on average.

--Bloomberg News

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