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After Comcast's failed bid, Charter and Time Warner Cable agree to merger

The bulking up of a second giant would shake up the cable industry, which is struggling to keep pay-TV subscribers as all-digital rivals emerge.

Time Warner Cable and Charter could soon become bedfellows. CNET

When one door closes, another opens.

That must be the mantra Time Warner Cable is saying on Tuesday after Charter Communications announced that it will merge with the cable provider and form a new firm known for now as "New Charter."

The proposed deal would dramatically change the makeup of the cable industry, which is struggling to keep pay-TV subscribers as all-digital rivals emerge. Combining Time Warner Cable and Charter, along with Bright House Networks, would create another giant in the cable industry to compete with Comcast, the biggest pay-TV and broadband provider in the US. But the cable industry as a whole competes for television subscribers against satellite providers as well as upstarts like Netflix and PlayStation Vue.

If the merger is successful, the newly formed company would would serve 23.9 million customers across 41 states, solidifying its status as the second-largest company in the cable industry behind Comcast, which has 27 million subscribers. It would be titan versus titan, then everyone else.

The announcement comes just a month after Comcast ended its own separate bid for Time Warner Cable, a deal that fell apart in the face of regulatory opposition.

The deal would combine Time Warner Cable's more than 15 million customers with Charter's nearly 7 million subscribers. Bright House, which Charter plans to acquire for $4.5 billion, will also be rolled into New Charter, adding its approximately 2 million customers to the newly merged company.

Charter's deal values Time Warner Cable at $78.7 billion, or $195.71 a share. Charter president and CEO Tom Rutledge would stay on as New Charter's chairman and CEO.

The companies said Tuesday that the deal would allow them to more easily invest in faster networks, deploy more Wi-Fi hubs and offer more television channels. Critics, however, argue that giving one company more market power could harm consumers and new rivals. It could push consumer costs higher, force television networks to enter unfavorable contracts, and ultimately hurt those competing services like Netflix that rely on the cable industry and its broadband networks to stream video to their own customers.

When one suitor backs out, try another

The deal is also a tale of second chances. Charter has made overtures for Time Warner Cable on several occasions. Its latest came in January 2014 when the company offered $132.50 a share to merge with Time Warner Cable -- which rebuffed the offer to go with one from a bigger competitor.

In February 2014, Time Warner Cable inked a deal with Comcast valued at $45 billion that would have created a giant cable company with 30 million subscribers and 50 percent ownership of the entire US cable industry. To allay fears of competitive dominance, Comcast was willing to sell off some of its subscribers to -- of all companies -- Charter.

But Comcast and Time Warner Cable argued that quite the opposite would have occurred. Comcast and Time Warner Cable argued that competition would remain robust after their merger, as selling the batch of subscribers would keep its combined market control below a previously established regulatory threshold. They also attempted to reassure investigators by noting Comcast and Time Warner Cable don't directly compete in any cities, so no market would lose any options if the two joined.

In April of this year, however, Comcast ended its plan to merge with Time Warner Cable as it became clear regulators would oppose the deal. Federal Communications Commission Chairman Tom Wheeler, whose office took the lead in investigating the combination, lauded the decision, saying the merged company "would have posed an unacceptable risk to competition and innovation."

That risk will not be a concern in the New Charter deal, according to the chief executives involved. In their prepared statements Tuesday, they drove home the point that they view the deal as a positive for consumers.

"With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully-featured voice products, at highly competitive prices," Rutledge said. "In addition, we will drive greater competition through further deployment of new competitive facilities-based WiFi networks in public places, and the expansion of the facilities footprint of optical networks to serve the large, small and medium sized business services marketplace."

Unlike the Comcast deal, analysts seem confident that the New Charter merger will find its way to completion. In a note to investors on Tuesday, J.P. Morgan's Philip Cusick said that while the companies will need to adeptly navigate sometimes choppy regulatory waters, "we still expect the deal will be approved."

Comcast CEO Brian Roberts was positive about the deal, despite the possibility of having a major competitor that would nearly match his company in size. Roberts said in a statement that the "deal makes all the sense in the world." He also congratulated the companies on inking a deal.

Several cooks in the kitchen

New Charter may create a somewhat complicated corporate structure, given just how many companies will own a stake.

In March, Charter announced plans to acquire Bright House for $10.4 billion. The move was a side deal that resulted from the possible tie-up of Time Warner Cable and Comcast and gave Charter more power in a market that could have been dominated by a single behemoth.

After the deal fell through, however, it was unclear whether Charter would still attempt to acquire Bright House. On Tuesday, Charter said that it has modified its agreement with Bright House. That modification will see New Charter own between 86 percent and 87 percent of Bright House and Bright House parent Advance/Newhouse will own the remaining shares. In addition, Advance/Newhouse will own approximately 13 percent to 14 percent of New Charter.

Meanwhile, another company, Liberty Broadband, is in the mix. Liberty, which owns part of Charter and Time Warner Cable, will inject $5 billion into the deal, giving it ownership of between 19 percent and 20 percent of New Charter. Time Warner Cable shareholders will retain ownership of between 40 percent and 44 percent, leaving Charter with the rest.

The range in ownership is due to how Time Warner Cable shareholders choose to structure their payout. In one scenario, shareholders will receive $100 in cash and New Charter shares equivalent to .5409 shares of Charter for each Time Warner Cable share they own. They can also opt for $115 in cash and New Charter shares equivalent to 0.4562 shares of Charter.

The companies expect the deal could be approved by the end of the year.

Time Warner Cable shares were up $7.28 to $178.43, shy of the $195.71 estimated per-share value of Charter's offer. Charter shares were down $1.15 to $174.18.

This story has been updated throughout the morning.