(If) Charter and Comcast Come Together, (Almost) Everyone Benefits

With the assistance of jedi cable master John Malone, Charter Communications may be back in play as part of the biggest cable consolidation effort in history.

Apr 28, 2014 at 8:00PM

Inevitably, Liberty Media Chairman and Godfather of Cable John Malone found a way to make the biggest (pending) cable TV deal in history tip to his favor. When Comcast (NASDAQ:CMCSA) announced it had reached an agreement to acquire Time Warner Cable (NYSE:TWC) earlier this year, it looked as though Charter Communications (NASDAQ:CHTR), one quarter-owned by Liberty, had been left out in the cold on what would surely be a game-changing deal for the pay TV industry. Never one to leave the battlefield, Malone, Liberty, and Charter found a way back in the deal. If the megamerger goes through, Charter and Liberty investors may have the best deal of all.

Audible
The biggest impediment to a deal between Comcast and Time Warner Cable is regulatory approval. If it goes through, the No. 1 cable operator in the nation will join hands with the No. 2 provider for the low, low price of $45 billion. Understandably, this has consumer-rights watchdogs up in arms, and regulators are in the hot seat to make the best decision.

The proposed merger had already involved the divestiture of more than 2 million subscribers to keep things "fair," but Charter may have just swooped in and sealed the deal, all while getting near what Malone had wanted all along. Step aside Donald Trump, this is a master class in the art of the deal.

Comcast and Charter have agreed to involve the latter in the merger agreement whereby Charter will purchase 1.4 million subscribers from Time Warner Cable's batch, and will also be a 35% owner of a new joint venture between Comcast and it -- accounting for another 2.5 million subscribers. The third element to the deal is the most complex -- a subscriber swap. Charter and Comcast would trade 1.65 million subscribers, likely to strengthen existing markets for the respective businesses. The total cost of the proposed deal: $20 billion.

What it means
Now, this isn't as massive in scale as Charter's original plan to buy Time Warner Cable (an offer that was quickly rebuffed several times by TWC management), as that would have involved Charter picking up more than 10 million subscribers. Instead, it's a much more affordable deal than the prior, $60 billion-plus takeover fee, that ties together the biggest cable companies in the country and presents a united front in what is a never-ending power struggle between content owners and distributors, not to mention the streaming invasion. Charter ensures its competitive position in the consolidating cable business, which many questioned after the Comcast-Time Warner Cable deal was announced.

Will the deal go through? It's purely speculation until regulators stamp "yes" or "no," but it likely makes the merger more appealing to the government as it involves a third party and, in theory, keeps things "competitive." The consumer may come in a distant fourth place in the benefits category, but they were never really part of the deal to begin with. Charter and Liberty investors, keep a close eye on this one.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple

Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Liberty Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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