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In a fallow year for mergers and initial public offerings, it is fitting that the largest US transaction of the year should be a combination of both. On Friday, the John Malone-backed Charter Communications announced that it would acquire smaller pay TV and broadband rival Cox Communications for $34.5bn including net debt.
Cox is privately held by a family of the same name, with an empire that also includes local television networks and automotive trade publications. Of the $22bn equity purchase, only $4bn comes in cash with the rest in the form of Charter shares. The family will now own a quarter of the listed Charter, which after the tie-up will have an enterprise value of nearly $200bn and 38mn customers stretching across the US.
This is a far cry from the Charter that filed for bankruptcy 16 years ago. Liberty Media, controlled by “Cable Cowboy” Malone, took a stake in 2013. Since then Charter has shifted its emphasis to broadband internet, and lately internet on mobile devices.
As the merger market slowly thaws, it makes sense that logical, well-flagged mergers such as this one would happen first. It has long been clear that the US cable television industry is converging on a duopoly between Charter and Comcast. In volatile markets, it helps to have a seller prepared to accept shares instead of cash. The Cox clan will, by taking stock, get to share in any future snapback in value.
At an industry conference on Thursday, Charter’s chief executive Chris Winfrey said he weighed making acquisitions against the alternative of repurchasing the company’s shares. That shows in the fact that Charter has valued Cox at 6.4 times estimated ebitda for this year, the same multiple on which Charter itself trades. Factoring in the $500mn of expected cost savings, that falls to 5.9 times.
This ought to be a relief to shareholders who were stung by Charter’s $79bn acquisition of Time Warner Cable a decade ago, which came at nine times ebitda. And Winfrey could use some investor goodwill: Charter stock has almost halved since 2021, pressured by plateauing broadband subscribers, competition in mobile and a pay TV business already demolished by streaming services such as Netflix.
The Cox family is not quite as dependent as other shareholders on Charter’s valuation recovering: it has also taken $6bn of preferred securities that convert into shares at a price 35 per cent above where Charter is today. Until then, the preferred stock pays a 7 per cent annual dividend.
The result is akin to the family having finally taken its pay TV company public, but with some insurance against wobbly equity markets. It is the finishing touch on a transaction that looks to have been carefully engineered to suit strange times. Still, getting any kind of deal done this year feels like an accomplishment.
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