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Charter Communications: What Does The Comcast Deal Falling Through Mean For Brighthouse?

Apr. 27, 2015 8:40 AM • chtr

  • The breakup of the Comcast deal allows for Charter to review its deal with Brighthouse.
  • A merger would make sense if Charter does decide to make another attempt at merging with Time Warner Cable.
  • The merger would continue with the industry trend of consolidation.

Charter Communications (NASDAQ:CHTR ) could stand to benefit from the recent fallout regarding the failed merger between Comcast Corporation (NASDAQ:CMCSA ) and Time Warner Cable (NYSE:TWC ). This isn't to say that Charter should necessarily be celebrating - its own deal with Comcast as a part of the merger also falls through by default. However, the breaking of the merger will allow for Charter to determine whether or not it wants to continue its merger with Brighthouse, leaving shareholders in a bit of a loop.

The Deal With Comcast

The most immediate impact of the deal between Time Warner and Comcast falling through is that Charter's deal with Comcast will also fall through. Under a proposed deal to help ease Charter's objections to the merger, Comcast offered to give Charter 1.4 million existing Time Warner subscribers. However, Charter was not done at the bargaining table. It would also receive 33% of a newly formed company that would serve 2.5 million households (and would later be able to acquire that company). Essentially, with the deal falling through, Charter obtains none of these benefits; however, the falling through of the deal may benefit Charter in the long run anyway.

Acquisition of Brighthouse

Another side effect of the falling through of the Comcast and Time Warner merger may be that Charter's merger with Brighthouse is affected. Before the announcement of the falling through of Comcast's merger, Charter entered into an agreement to purchase Brighthouse Networks for $10.4 billion. This deal was widely regarded as not having problems being able to get through Federal scrutiny, and it is likely that if Charter wants to be able to get the deal done, it will be able to acquire Brighthouse. Charter is currently the number four cable provider in the United States, and Brighthouse is number six.

With the falling through of the merger between Time Warner and Comcast, Charter is now able to exercise a provision within the merger agreement that allows for Charter to open a thirty-day window to decide if it wants to amend the agreement. This could potentially allow for the company to walk away from the deal with Brighthouse. One obvious reason why Charter would walk away from the deal with Brighthouse would be if it decides that it needs the cash for a different acquisition. However,

it is important to note that the deal is mostly a stock-based transaction, and would create a company with a free cash flow projected to be slightly under $1 billion. With this in mind, it is likely that Charter will decide to go through with the deal for Brighthouse, as it would make a larger company with a more attractive EBITDA, and would provide more free cash flow.

Why The Transaction Makes Sense

Should Charter decide to go through with the transaction, it would become a bigger player in the cable industry. More importantly, however, its balance sheet would become more attractive, which would be important if it is planning another, potentially larger, transaction.

Enter Time Warner Cable. Charter has previously bid to acquire Time Warner Cable, and was spurned partially out of criticism for how levered the new company would be. By having a healthier balance sheet heading into the transaction, it would be possible for Charter to increase its bid for Time Warner, and to potentially get the deal done. It is likely that Charter will take another long look at whether or not it will be able to close a deal to acquire Time Warner Cable, and if the company wants any hope of being able to sweeten the offer, it is going to have to rely on the balance sheet of a combined Charter and Brighthouse.

In the event that Charter decides not to pursue a transaction to acquire Time Warner Cable, it is likely that the company could still elect to continue its merger with Brighthouse. The transaction would create a larger customer base, and would increase Charter's presence in multiple markets. With the large amount of consolidation that has occurred within the cable industry, I see this as a continuation of the trend, and believe that it is likely that Charter will continue to move forward with its purchase of Brighthouse.

While the Brighthouse and Charter deal many now be under review by Charter Communications, this deal will still likely go through. The larger company will provide for a much larger network of subscribers, and should help Charter to become more competitive in key markets. Furthermore, it would extend the company's reach and would help to create a more attractive balance sheet, in the event that Charter decides to pursue a merger with Time Warner Cable.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Category: Bank

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