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Comcast Nation

It all started with a call on the way to Sochi.

A day before he was to leave for the picturesque Russian resort, site of the XXII Olympic Winter Games, Comcast chairman and CEO Brian Roberts picked up the phone and dialed up Time Warner Cable chairman and CEO Rob Marcus.

“Are you still interested?” Roberts said to the TWC chairman, who was in the middle of an investor road show, according to several people familiar with the matter.

That question was the culmination of more than a year of informal talks — starting with former TWC chairman and CEO Glenn Britt — that set the wheels in motion for what became Comcast’s $45.2 billion all-stock offer for Time Warner Cable.

Roberts, according to people familiar with the transaction, put Michael Angelakis — his vice chairman, chief financial officer and chief deal-maker — in charge of hammering out what became a $158.82-per-share deal. Roberts kept tabs on its progress through calls to the deal bunker while he attended NBC employee functions at the Winter Olympics — which the Comcast-owned broadcaster is airing — as well as the opening ceremony and a hockey game.

What came out of those sessions will transform the pay television industry, creating a clear No. 1 leader and accelerating changes already roiling the ecosystem. The combined company, after planned divestitures, would have 30 million subscribers, far ahead of second-place DirecTV’s 20 million customers — and would solidify Roberts’s stature as the king of cable.

In an interview with Multichannel News last week, Marcus said a Comcast combination has always been attractive. “The concept of a combination [with Comcast] has been something I have found to be intriguing for quite awhile,” Marcus said. “I feel great about the deal. One of our significant shareholders called it a dream combination.”

Comcast’s offer easily trumped Charter Communications’ unsolicited $132.50-pershare bid for TWC Jan. 13. And it sends cable legend John Malone — who had spurred the recent consolidation frenzy last March when he purchased a 27% interest in Charter Communications — firmly to the sidelines.

The TWC deal, which including debt is valued at about $69 billion, is expected to be immediately accretive to free cash flow. It also maintains the combined company’s investment-grade credit rating, with a leverage ratio of about 2.3 times cash flow, including an estimated $1.5 billion in overhead, operating and capital-expenditure synergies.

Comcast Cable CEO Neil Smit, who will continue to run the combined cable operations, said on a conference call with analysts that while there could be some programming synergies, most of them will be in the form of eliminating duplication in fees and services, marketing, supply chain and network operations. He added that Comcast believes that more than 50% of those synergies can be achieved in the first year.

Comcast had started out as a possible ally to Charter in its attempt to take over the larger TWC. Back in January, Comcast was reported to be in early talks to purchase certain TWC systems in New York City, New England and the Carolinas from Charter after it had finalized its deal to acquire TWC. Those systems represented about 3 million customers.

Along the way, though, Comcast — which had been contacted by TWC earlier in the process about a possible merger — decided to take a more proactive approach.

“Things started to intensify over the last week,” said one person familiar with the negotiating process. “It became apparent that this could be an approvable deal.”

Sources confirmed reports that talks between Charter and Comcast turned sour about a week prior to its TWC announcement.

“Comcast didn’t like the way things were transpiring,” said one person familiar with the talks, adding that Comcast executives were wary of the effect a contentious proxy fight between Charter and TWC could have on the industry. Charter executives were put off by Comcast’s reluctance to contribute cash to the deal.

Once Comcast had decided to pursue TWC on it own, it was a relatively quick path to a signed agreement.

As part of that deal, TWC shareholders will receive 2.875 shares of Comcast stock for every TWC share they own, valuing the company at $158.82 per share, a 17% premium to its closing price on Feb. 12. That premium was quickly eroding on Feb. 13, as TWC shares soared on the news of the pending transaction, closing at $144.81, up 7% or $9.50 each. Comcast shares closed at $52.97 each (down 4%, or $2.28 per share) on Feb. 13 while Charter dipped to $128.91 per share, down 6.3% or $8.66 per share.

The deal values TWC at about 7.9 times 2014 cash flow, well in line with recent transactions.

While both sides exuded confidence, the deal is by no means a slam dunk. Despite Comcast’s optimism, the transaction still has to clear regulatory hurdles as it nears an expected year-end close. And although the deal has its skeptics — MoffettNathanson principal and senior analyst Craig Moffett wondered where the $1.5 billion in expected deal synergies would actually come from — on the surface it would seem both Comcast and TWC have come out on top.

TWC gets the price it wanted — Marcus had insisted his company was worth $160 per share — and the added bulk of Comcast. Comcast said it would divest about 3 million of TWC’s 11 million subscribers after the deal is closed, giving it a total of 30 million customers and reducing the combined company’s reach to under 30% of U.S. television households. That’s about the same market share Comcast had after its 2002 purchase of AT&T Broadband and its 2006 purchase of systems from Adelphia Communications, which it believes will bode well with regulators.

The added scale will help Comcast it in its quest to license its X1 and X2 platforms to other operators — it is currently in talks with Cox Communications — and could facilitate other technological innovations.

The additional heft also allows Comcast to better compete against Internet giants like Google and online video outlets like Netflix, which has about 44 million subscribers worldwide. With 30 million customers, Comcast could justify paying more for programming rights for its own online video venture, Streampix.

Comcast customers will also gain access to TWC innovations such as “Start Over,” which allows customers to restart a live program in progress to the beginning, and “Look Back,” which allows customers to watch programs up to three days after they air live, all without a DVR.

The combined company’s advertising reach will be a force to be reckoned with. It will have operations in 19 of the 20 largest cities in the country, including New York, Los Angeles, San Francisco, Chicago, Miami and Dallas, and will generate a combined $86.8 billion in annual revenue, $29.4 billion in cash flow and $11.2 billion in free cash flow.

“It really is a one-of-a-kind combination,” Marcus said on a conference call with analysts.

For other operators, the deal could mean a continued move toward consolidation — Charter is expected to at least look at other possible deals. Whether the new cable giant will help or hinder escalating programming costs also remains to be seen.

Operationally, the combination could finally ease the hemorrhaging of video subscribers — TWC lost about 833,000 basic video customers in 2013. With improving subscriber metrics and a three-year operations plan in place, TWC could now accelerate those improvements exponentially.

Comcast has consistently improved basicvideo losses under the leadership of Smit. In the fourth quarter, the Philadelphia-based MSO reported its first three-month period of positive video-subscriber growth in 26 quarters, adding 43,000 basic-video customers. Its X1 platform has proven to be a catalyst for new products and services.

It also has a proven track record in effectively assimilating large acquisitions. It completed both its integrations of AT&T Broadband and Adelphia Communications years ahead of schedule. Roberts, however, was vague in terms of what he believes will be the next steps operationally for Comcast/ TWC.

“The real answer is we go back to work,” Roberts said on the call. “Time Warner Cable will run Time Warner Cable.”