By Shalini Ramachandran And Gautham Nagesh
As top executives at Charter Communications Inc. and Time Warner
Cable Inc. laid out their vision Tuesday for the cable companies'
planned merger, their pitch seemed aimed as much at Washington as
at Wall Street.
Charter Chief Executive Tom Rutledge, speaking on a conference
call after the company announced a $55 billion agreement to acquire
Time Warner Cable, pledged to invest in new broadband products and
refrain from the sorts of pricing tactics that have triggered a
backlash from regulators.
Charter's deal, which also includes an acquisition of the
smaller operator Bright House Networks, would create a new U.S.
cable giant with about 24 million total customers, second only in
size to Comcast Corp. among cable operators.
The company is trying to avoid the fate of Comcast's proposed
merger with Time Warner Cable, which fell apart last month when it
became clear regulators had strong reservations about the combined
company's ability and incentive to harm the burgeoning online video
market.
Mr. Rutledge, who will become chairman and CEO of the new
behemoth, said Charter won't impose caps on the data consumers can
use and won't institute usage-based broadband pricing. Regardless
of whether the Federal Communications Commission's new tough
Internet rules get tossed out after a court challenge, he said,
Charter has no plans to block any Internet traffic or engage in
"paid prioritization" on its pipes.
Mr. Rutledge's comments Tuesday highlight how much the
regulatory landscape has shifted over the past year and a half.
Many analysts and industry executives predicted Comcast's deal
would go through and were surprised when it didn't. Now, any
companies proposing a big cable merger are likely to tread
carefully and be especially sensitive to the concerns regulators
laid out in the Comcast deal.
"Through Charter we'll offer consumers a broadband product that
makes watching online video, gaming and engaging in other
data-hungry applications a great experience, including at peak
times," Mr. Rutledge said.
The deal will be the first test of this magnitude for Charter's
modest D.C. lobbying operation headed by executive vice president
of government affairs Catherine Bohigian. She was hired from
Cablevision Systems Corp. two years ago by Mr. Rutledge to start
and staff Charter's D.C. office from scratch--right about when
Charter began courting TWC.
In an interview, Ms. Bohigian said Charter learned from the
failed Comcast-Time Warner Cable merger what issues regulators are
focused on, including how deals could impact the growing market for
"over the top" Web video services. Charter was involved in the
Comcast transaction because it was set to acquire some divested
assets if the Comcast-TWC deal closed.
"Having gone through that transaction gave us a window into what
their biggest concerns were, so we can make sure from the beginning
that we respond to exactly the concerns they have," Ms. Bohigian
said.
Under the terms of the deal announced Tuesday, Charter will
offer Time Warner Cable $195 per share in cash and stock, a 14%
premium to the company's Friday closing price. Shareholders will
choose how much cash they will receive--$100 per share or $115. The
combined company will have about $62 billion in debt, which could
go up to $66 billion if TWC shareholders elect to take the
cash-rich option.
If regulators block the deal, Charter could owe Time Warner
Cable about $2 billion, or Time Warner Cable could be responsible
for the breakup fee if it accepts an offer from a rival suitor,
people familiar with the matter said.
Both Mr. Rutledge and Time Warner Cable Chief Executive Rob
Marcus sought to make the case that the deal is far different from
Comcast's, because it won't result in a company gaining outsize
market power.
"We will not have market power in high-speed broadband or
video," Mr. Rutledge said. Charter-TWC will have less than 30% of
the market for Internet speeds above 25 megabits per second, which
is the FCC's new benchmark for broadband. Comcast-Time Warner Cable
would have controlled at least 57% of that market.
He said that Charter's minimum broadband speed tier is 60
megabits per second today--"considerably faster and less expensive
than Time Warner Cable's comparable tiers." He said Charter would
expand these offerings across its new footprint.
Ms. Bohigian, Charter's point person in Washington, spent seven
years at the FCC earlier in her career, serving as an adviser to
former Chairman Kevin Martin and head of the agency's office of
strategic planning and policy. Her small internal team will get
outside help from outside lawyers who will focus on the reviews by
the Federal Communications Commission and antitrust regulators.
A major factor will be whether any major resistance develops
from media companies and public interest groups--as it did in the
case of Comcast's deal.
FCC Chairman Tom Wheeler issued a statement on Tuesday
reiterating that the companies must prove the deal would benefit
consumers.
Some consumer groups also have concerns. "When it comes to cable
consolidation, history teaches us to be very concerned about the
benefits for consumers," Consumers Union policy counsel Delara
Derakhshani said. "Prices for cable and broadband continue to go
up, and customer service is dismal."
Mr. Rutledge in an interview said he hopes to build Charter by
adding more subscribers. "That's how we create value, not by
cost-cutting or raising prices," he said.
In the interview, Mr. Rutledge said he embraces the trend of
consumers streaming TV through apps and third-party media devices
like Roku and Apple TV. He said it's "not long" before Charter
sells online video services like Netflix and Hulu integrated with
its user interface for pay television.
Charter and Time Warner Cable executives said a combined company
would be a "pure-play" cable company, without a major investment in
an entertainment arm like Comcast's NBCUniversal, which controls
cable channels and a TV and film studio.
Still, the new company's major shareholders-- John Malone's
Liberty Broadband Corp. and Bright House owner
Advance/Newhouse--have ties to big content companies. Mr. Malone
and Advance/Newhouse each hold significant voting stakes in
Discovery Communications, a major TV programmer. Mr. Malone also
has a big voting stake in Starz, the premium channel, and a small
stake in Lions Gate Entertainment Corp., the television and film
studio. .
Some analysts said eventually Charter may need to raise
broadband prices for consumers to recoup its pricey investment on
the deal, since the traditional pay TV business is under
pressure.
"Broadband pricing is almost an insurance policy for cable
operators in that if all else fails, you've always got the option
to raise broadband rates," said Craig Moffett, analyst at
MoffettNathanson. But he noted that there's an "obvious danger" to
that on the regulatory front, so Charter is likely to be cautious
in the near term.
Write to Shalini Ramachandran at
shalini.ramachandran@wsj.com
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