Does Charter have some bright ideas about Bright House?

It seems as if that might be the case, given the press reports that Charter Communications Inc. has quietly been talking to Bright House Networks about buying the smaller US cable operator for months. Citing unnamed sources, Bloomberg reported Thursday that Charter is negotiating to acquire Bright House in an all-stock deal that could be valued at $12 billion.

Neither company is commenting directly on the reports right now. Charter has declined comment altogether, while Bright House issued a somewhat vague statement that indicated the talks with Charter could, or couldn't, be going on. "Since the Time Warner Cable/Comcast transaction was announced, there has been some speculation regarding Bright House," a Bright House spokeswoman said. "While we have had conversations with many parties about this transaction, we do not have an agreement with anyone regarding future plans for Bright House."

Nevertheless, Wall Street seems to believe something is going on here. Charter's stock price jumped more 7% Thursday after the Bloomberg report came out, before closing $193.46, up nearly 6% for the day.

Assuming that a deal is imminent, why would Charter chase after privately held Bright House, the sixth largest US cable operator with about 2.5 million overall subscribers, right now? After all, Charter is already set to inherit up to 3.9 million cable subscribers from Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC) if federal regulators approve Comcast's proposed $45.2 billion takeover of TWC. That transaction would nearly double Charter's size, leapfrogging it from the fourth biggest to the second biggest MSO in the land. (See Comcast, Charter Talking Turkey? )

That's where the speculation gets most interesting. One school of thought is that Charter could be wooing Bright House because it fears that the fed will shoot down the Comcast-TWC deal, leaving it with no subs to gain in a divestiture. In that case, Charter would end up more than 50% bigger through its purchase of Bright House and still be free to pursue the company it really wants, Time Warner Cable.

"There are some who would argue that Charter would likely want to keep its powder dry in case they get the opportunity to buy all of Time Warner Cable," media analyst Craig Moffett, a principal in Moffett Nathanson LLC, wrote in an investors note to clients. "On the other hand... if the deal is indeed all-stock then it would actually provide incremental dry powder (in the form of additional debt capacity) to make a subsequent run at TWC."

Another school of thought is Charter wants Bright House because it wants to keep Bright House out of Time Warner Cable's hands if Comcast's planned purchase of TWC falls apart. Since TWC and Bright House used to be connected and the two MSOs still are close partners in buying programming and equipment, Charter could fear that a still independent TWC would swoop in to buy Bright House. That gambit would make TWC larger and harder for Charter to acquire in another hostile takeover bid.

Then there's the theory that Charter expects the Comcast-TWC deal to go through but wants Bright House too so that it can grow even larger, scaling the 10 million subscriber mark. From cable titan and Charter backer John Malone on down, Charter executives have made it no secret that they want to bulk up the company as much as possible. That's why they pursued TWC so ardently to begin with, only to lose out to a last-minute bid by Comcast. (See Comcast Strikes $45B Deal for TWC.)

Finally, Charter could simply want Bright House because the latter MSO makes for a pretty attractive package. With more than 4 million homes passed and 2.1 million video, 1.9 million broadband and 1.1 million voice subscribers spread over five states but concentrated mainly in the central Florida markets of Tampa and Orlando, Bright House offers decent size, large appealing markets and solid operations to any suitor.

"As an asset, BHN has much to recommend it," Moffett noted. "The company has a reputation for being extremely well run, and it has -- almost uniquely among cable MSOs -- a strong reputation for service and customer satisfaction."

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What's far less complicated to see is why Bright House would want Charter as a suitor. Left high and dry on the sidelines by the Comcast-Time Warner Cable deal, Bright House could fear losing the protective big brother that it has long enjoyed in TWC.

Most notably, as part of its spinoff from its formal partnership agreement with Time Warner back in 2002, Bright House retained the right to buy programming rights under the discounted rates negotiated by the much larger TWC. If the Comcast-TWC deal goes through, Bright House could lose those preferred rates and start having to shell out a lot more for content.

So there are plenty of good reasons why these two big cable companies might want to hook up. Now we just have to see whether they actually do so. I'm betting that this deal happens.

— Alan Breznick, Cable/Video Practice Leader, Light Reading