Last updated: April 28, 2014 7:53 pm

US cable: strange bedfellows

Charter is finally getting a bite of cable assets it can properly chew
Randy Groves, a Comcast Corp. field service technician, works on an overhead cable box during a residential cable installation in Reading, Pennsylvania, U.S., on Wednesday, Jan. 19, 2011. Comcast Corp.'s proposed merger with NBC Universal won approval from U.S. regulators, clearing the way for the largest U.S. cable company to combine with a national broadcaster. Photographer: Bradley C. Bower/Bloomberg *** Local Caption *** Randy Groves©Bloomberg

Charter Communications is getting another bite at the apple. This time it’s safe to chew. On Monday it said it would snare 4m cable TV subscribers that are up for grabs as part of the Comcast/Time Warner Cable tie-up announced in February. Charter lost out to Comcast back then. But the demands of antitrust authorities breed strange bedfellows. To win regulatory approval (Comcast/TWC will still have nearly a third of the US cable market) Comcast needs Charter’s help. Whatever bitterness that Charter held towards Comcast for snatching TWC first should now subside. Charter’s shares are up nearly a fifth since rumours of this latest deal broke 10 days ago.

After the multiple stages of its deal with Comcast/TWC, Charter will own or manage 8m cable subscribers, about double its current level. The first two steps are straightforward: Charter pays $7bn to acquire 1.4m former TWC customers and, separately, the two sides exchange 1.6m subscribers to better line up their respective regional exposures.

The next part of the deal is more intriguing. Comcast/TWC will create a new public company for housing 2.6m subscribers. This company would initially be two-thirds owned by Comcast shareholders, and the rest by Charter (which will also manage the subscribers). The new company will have relatively high leverage of 5 times debt to cash flow, around the same as Charter and more than twice the level of Comcast. Thus, investors interested in US cable can choose between highly-leveraged bets (Charter and the new SpinCo) or the moderately-indebted Comcast.

Clever structures aside, it is not obvious why this deal will assuage regulators. Comcast becomes an only somewhat smaller juggernaut. And Charter becomes the ironic cheerleader for Comcast, which stole the object of its affection.

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