Bright House Emerges as a Player in the New Cable Drama
Comcast’s failed bid for Time Warner Cable puts spotlight on Newhouse business
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.
Charter to Buy Bright House (March 31)
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.