Outlook for approval of Charter-Time Warner Cable deal appears favorable

Charter Communications Inc. is moving quickly and aggressively to transform itself into one of the nation’s most powerful Internet service and pay-television providers, one that also sees benefits in the growing use of online streaming services such as Netflix.

Its agreement to buy Time Warner Cable Inc., announced Tuesday, and its pending deal for the much smaller Bright House Networks appear at the outset to have a good chance of winning antitrust clearance and regulatory approval.

Yet it’s unlikely to be a smooth path for Charter, despite Chief Executive Tom Rutledge’s insistence that the purchase of the bigger Time Warner Cable will mean “better products at better prices” for subscribers.

The Federal Communications Commission, for one, is more focused than ever on the dearth of broadband providers. That was one of its major concerns about Comcast Corp.’s effort to buy Time Warner Cable, a deal that fell apart last month amid antitrust and regulatory concerns.

Consumer groups, in addition, aren’t buying the oft-repeated argument that major consolidation in the industry is in the best interests of customers.

“When it comes to cable consolidation, history teaches us to be very concerned about the benefits for consumers,” said Delara Derakhshani, policy counsel for Consumers Union, which publishes Consumer Reports magazine. “Prices for cable and broadband continue to go up, and customer service is dismal.”

On Tuesday, Charter said it would buy Time Warner Cable for $56.7 billion in cash and stock. Along with the pending Bright House deal, Charter would become the nation’s third-largest pay-TV service with more than 20 million TV, Internet and phone customers in 41 states.

The combined company would give Charter a colossal footprint in Southern California with more than 2 million customers in Los Angeles, Riverside, San Bernardino, Orange, San Diego, Ventura and Santa Barbara counties. Currently, Charter has 300,000 subscribers in Burbank, Glendale, Long Beach and parts of Malibu and other areas.

The deal soon will pay dividends to Charter customers: Rutledge told The Times that in the next few weeks, the company would offer its customers the Dodgers’ TV channel, SportsNet LA, ending a yearlong dispute between Time Warner and other carriers that has left many baseball fans unable to watch Dodgers games on TV.

Rutledge touted Charter’s digital suite of video, data and voice services as the way it would be able to offer better products at better prices. But except for adding new subscribers to gain revenue, he didn’t specify how the nation’s fastest-growing cable company could keep prices low given the more than $60 billion in debt Charter would wind up with after the deals are completed.

Consumers are using high-speed Internet — Charter’s minimum is 60 megabits per second — to stream video from sites such as Netflix and Hulu, making broadband an increasingly valuable service for cable companies as conventional video subscribers decrease.

“We embrace that even though some people think that it competes with what we have historically sold, which is cable TV,” Rutledge told The Times. “It also makes the broadband more valuable. And we also want to improve the cable TV experience.”

With AT&T Inc. closing in on regulatory approval of its $48.5-billion purchase of DirecTV, some public interest groups warned that average Americans would end up on the losing end with less competition leading to higher prices and even worse customer service.

Derakhshani at Consumers Union noted that a Consumer Reports customer satisfaction survey of 17 cable providers last year ranked Charter 14th and Time Warner Cable 16th.

Meantime, content providers also are wary. The Writers Guild of America, West, said it was “extremely concerned” about the implications of the deal.

“Mergers and consolidation rarely serve the public interest as distributors use their increased power to squeeze programmers and raise prices for consumers,” the Hollywood union said.

Charter, backed by cable pioneer John Malone’s Liberty Media Corp., had previously structured a $10.4-billion deal to buy privately held Bright House, which has more than 2 million subscribers.

The high-profile deals deliver on Charter’s ambitions but also represent a triumph for Malone, who was a key architect of the cable TV industry as it consolidated in the 1990s.

The Colorado billionaire has kept his eye on Time Warner Cable for two years. It first appeared that Malone and Charter had been outmaneuvered by longtime rival Comcast, but when that deal collapsed, Charter quickly swooped in.

With the Time Warner Cable and Bright House subscribers, Charter would have more than 19 million high-speed Internet customers nationwide, 17.3 million cable TV customers and a growing portfolio of commercial customers with phone and Internet service.

The deal values Time Warner Cable at $195.71 a share, significantly higher than Friday’s closing price of $171.18. On Tuesday, Time Warner shares gained $12.42, or 7.3%, to $183.60; Charter stock rose $4.45, or 2.5%, to $179.78.

The deal requires Charter to pay at least $56.7 billion for Time Warner Cable’s outstanding shares. The value of the deal could increase if Time Warner Cable shareholders take advantage of an option to receive more cash and less Charter stock.

Charter also would assume Time Warner Cable’s $22 billion in debt in addition to the purchase price. The transaction would be highly leveraged, requiring Charter to secure financing of up to $30 billion. And Charter agreed to pay a breakup fee of $2 billion should the deal fall apart.

The merger would lead to a company much different from the one that would have been created had Comcast bought Time Warner Cable. For one, the purchase would produce a smaller company. Even with Bright House, Charter’s new base would be 40% smaller than the combined Comcast-Time Warner Cable pay-TV stable of 29 million customers.

Also, Charter would be the largest pay-TV provider in five of the top 20 markets nationwide, including Los Angeles. Comcast-Time Warner Cable would have been the largest provider in 17 of the top 20 markets, including L.A. and New York.

And after the acquisitions, Charter would have less than 30% of the high-speed broadband market under the FCC’s latest definition. A Comcast-Time Warner Cable combination would have controlled 57% of that market.

“We’re a very different company than Comcast, and this is a very different transaction,” Rutledge told analysts during a conference call Tuesday.

Analyst Jeff Wlodarczak at Pivotal Research Group agreed: “I think the outlook is quite solid for approval of this deal.”

He noted that Charter would not own any programming, unlike Comcast, which owns NBCUniversal, and that even after both acquisitions, the new company would be smaller than Comcast, the industry’s largest.

Gene Kimmelman, a former Justice Department antitrust official who now is president of public interest group Public Knowledge, agreed that Charter’s acquisition of Time Warner Cable is much less likely to be blocked by regulators.

But that doesn’t mean the deal is a slam-dunk for approval, he said.

“It’s not at all clear that this is in the public interest,” Kimmelman said. “There are many significant questions that need to be answered, and the burden is on the parties to show that.”

jim.puzzanghera

@latimes.com

meg.james@latimes.com

Twitter: @JimPuzzanghera and @MegJamesLAT

Puzzanghera reported from Washington, D.C.; James from Los Angeles.