To no one's surprise, Time Warner Cable (UNKNOWN:TWC.DL) has found a new suitor. Following the sudden end to Comcast's (NASDAQ:CMCSA) $45 billion takeover bid, Charter Communications (NASDAQ:CHTR) has stepped in with a $55 billion offer.
Will Charter complete the deal that Comcast couldn't close? And if so, what will this buyout mean for the cable industry's investors and customers?
What's going on?
First, let's consider the playing field.
Charter is offering Time Warner Cable shareholders a combination of cash and stock. At current Charter prices, this amounts to roughly $196 per Time Warner share. The company will also assume responsibility for nearly $24 billion of net debt, lifting the total price tag to $79 billion. If Charter's shares move up or down before the merger is closed, the final sum will be higher or lower, respectively.
At the same time, Charter amended its agreement to take over Bright House Networks. That deal was struck in March, when Comcast's bid for Time Warner Cable was very much alive. But Time Warner Cable happens to own a controlling 66% stake in Bright House, so the new buyout changes the terms of the Bright House agreement.
That's not all. Liberty Broadband (NASDAQ:LBRDA) also agreed to buy $5 billion of Charter shares upon the closing of the Time Warner Cable deal. That cash infusion will take some of the sting out of Charter's massive buyout bills.
If and when all of these transactions run their course, they will combine the second-largest American cable system (Time Warner Cable) with the fourth (Charter) and sixth (Bright House) names on that list. They'll add up to roughly 24 million TV and broadband subscribers across 41 states, in the same ballpark as Comcast on both counts.
This is not Charter's first dance with Time Warner Cable. In 2013 and 2014, Charter lobbed bids at the larger cable rival that ranged from $114 to $127 per share. But Time Warner Cable called the terms "grossly inadequate" and rejected all of these attempts. The company would have settled for $160 per share, which is almost exactly where Comcast's offer landed.
All of that bad blood now appears forgotten, and Time Warner Cable's board of directors has approved Charter's new and improved takeover offer.
What's the bigger story?
The Time Warner Cable-Comcast merger failed because regulators couldn't swallow the two largest companies in the cable industry joining forces. That deal would have created an absolute monster, covering about half of the United States under a single brand of cable services.
By contrast, the Charter deal would take Comcast down a notch. Instead of one giant trampling all over a horde of lesser lights, we will get ... well, two giants trampling the remainder of the industry.
The revamped cable sector would look much like the wireless phone industry. There, Verizon (NYSE:VZ) and AT&T (NYSE:T) have been lording it over a collection of far smaller names for years. Both companies will argue that they work in a vibrant industry with plenty of competition, but they enjoy wireless spectrum advantages that smaller players simply cannot match.
Real competition breeds innovation and pricing pressure. In the U.S. wireless industry we have neither (despite the best efforts of the smaller networks to change this grim reality). As a result, American calling plans and wireless data services are among the worst and most expensive in the developed world.
That's not a great role model to follow. Add in the fact that American cable companies compete even less than the wireless guys, and it is hard to see any consumer benefits springing from another big-ticket merger idea.
For example, I bet only one cable company serves your neighborhood, dear reader. If you have two TV service and/or broadband options, the other one would come from the local landline telecom. That's how it works in almost every corner of the nation, but hardly anywhere else in the world. Allowing several of the largest providers to join forces would do absolutely nothing to rectify this massive problem. On the other hand, it would give the newly minted cable giant more leverage when negotiating content pricing.
Seen from one very specific angle, you could argue that Charter's merger with Time Warner Cable would create a substantial rival to current market dominator Comcast. But in almost any other light, the merger comes off as another blow to an underserved consumer market.
The Federal Communications Commission might let this deal slide past the antitrust issues that torpedoed Comcast's plans. But it won't be an easy or quick process, and the final approval is far from guaranteed. In fact, I don't think it will happen at all without Charter and Time Warner agreeing to some strict conditions and adjustments.
Keep an eye on these tickers as the merger process progresses. In the meantime, I wouldn't recommend owning either Charter or Time Warner Cable. The merger is both too important and too fragile to ignore, adding far more risk than value to both stocks.