Instead of taking over the old Time Warner Cable, it now seems apparent that Charter Communications intends to become the new Time Warner Cable, only better.
With its previously rumored bid to purchase Bright House Networks and its more than 2 million video customers now a reality, Charter Communications Inc. is well on its way towards gaining the TWC-like scale that it has long desired. If the $10.4 billion deal goes through, along with Charter's planned series of complicated cable system purchases, splits and swaps with Comcast Corp. (Nasdaq: CMCSA, CMCSK), the new bulked-up Charter could end up owning or managing more than 10.1 million pay-TV subscribers in a footprint of 26.4 million homes spread mainly across the Midwest and Southeast, close to the sizes of both TWC's customer base and footprint today. (See Charter Snatches Bright House.)
That would easily transform Charter, now the fourth-largest US MSO with 4.3 million video customers, into the largest cable operator in the nation after Comcast, leapfrogging it well beyond the number three, Cox Communications Inc. . That's the same number two role long played by Time Warner Cable Inc. (NYSE: TWC), which is slated to be swallowed up by Comcast in the $45 billion deal struck last year, assuming that federal regulators finally end up approving the transaction, as Comcast, TWC and Charter executives all insist they still expect. (See Why Charter Fancies Bright House .)
As a result, Charter would likely gain the same kind of programming fee discounts that TWC has long enjoyed because of its size and industry stature. "As we go over 10 million subscribers, we sort of assume the Time Warner Cable role, if we negotiate well," Charter President & CEO Tom Rutledge said on a conference call Tuesday with press and financial analysts.
Beyond the scale that it has aggressively sought, though, Charter will also gain a bounty of other benefits if its acquisition of Bright House, the sixth-largest cable operator in the US, passes regulatory muster. For starters, Charter will gain well-managed cable systems from a fellow MSO that, unlike most larger cable companies, has a strong reputation for good customer service. In fact, the Bright House systems, particularly its two big ones in central Florida, are considered the cream of the crop in the industry.
Further, the Bright House cable systems have generally been upgraded and don't need a great deal of new capital investment, meaning that they are probably in better shape than many of the systems that Charter now runs and the ones that it stands to inherit if the Comcast-TWC deal closes. As Rutledge noted on yesterday's call, for instance, "about half" of Bright House's systems have already gone all-digital, including its flagship Orlando system. As a result, he expects to spend less capex on Bright House system upgrades and integrate its systems faster into the Charter fold than the systems it plans to pick up from Comcast and TWC.
Just as notably, Charter stands poised to gain control of two large, attractive markets -- Orlando and Tampa -- from Bright House, a big deal for a large MSO that mainly plays in Tier 2 and Tier 3 markets right now. Bright House now has 1.7 million of its video subscribers concentrated in these two lucrative, growing markets, passing a total of about 4 million central Florida homes. Charter executives see plenty of potential for more subscriber growth as the two markets continue to expand at faster than the average national pace.
"We think that the Bright House footprint has a lot of growth opportunities, both in penetration and more passings," said Charter CFO Christopher Winfrey, speaking on the same call as Rutledge yesterday. "This is one of the fastest growing places in the country. We expect Florida will continue to grow more rapidly than the rest of the country."
What's more, Bright House could accelerate Charter's long-overdue expansion into WiFi and other wireless services. With about 45,000 hotpots already deployed in central Florida, Bright House has been far more aggressive in WiFi than Charter so far. But Charter, which has been beefing up its wireless staff, aims to start catching up this year. Charter executives also plan to leverage the MVNO agreement that Bright House struck with Verizon Wireless several years ago in return for the sale of Advanced Wireless Services (AWS) spectrum to the carrier.
Finally, there's the business services boost that Bright House could deliver to Charter. With 135,000 commercial customer relationships, 19% commercial revenue growth last year, 18,000 miles of fiber and a sophisticated suite of Ethernet services in its Florida markets, Bright House has much to offer here. Charter -- which recently announced it would split its business service division into two separate units focusing on small-and-midsized firms and large enterprises, respectively -- has 386,000 commercial customers of its own and generated nearly $1 billion in business services revenue last year, 18% more than in 2013.
Even with Bright House and the various puzzle pieces from Comcast and Time Warner Cable, though, the new Charter still won't be as big as it would if it acquired all of TWC, as it strenuously sought to do over the second half of 2013 and the beginning of 2014. So, it likely won't be big enough to sate the boundless appetites of Rutledge and such other key Charter backers as the company's godfather, John Malone.
That's why, even after digesting the Comcast, TWC and Bright House systems, Charter will likely be looking around for still more cable properties to snap up. So don't be surprised if Rutledge and crew start knocking on more MSO doors, like those of Suddenlink Communications , Mediacom Communications Corp. and maybe even Cox in the next few months.
— Alan Breznick, Cable/Video Practice Leader, Light Reading