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Charter Communications' (CHTR) Move to Acquire Bright House is Credit-Positive Development - Moody's

March 31, 2015 5:00 PM EDT

Moody's says the announced plan of Charter Communications, Inc. (Charter) (Nasdaq: CHTR) to acquire Bright House Networks (Bright House) for $10.4 billion does not impact Charter's Ba3 Corporate Family Rating (CFR). The transaction would favorably expand scale and reduce leverage relative to our expectations for Charter following its previously announced transaction with Comcast Corporation (Comcast, A3 positive) and Time Warner Cable, Inc. (TWC, Baa2 on review for possible upgrade), but also elevate operational risk.

The acquisition of BrightHouse would bring an upgraded asset base and footprint with higher customer penetration than Charter's existing footprint. Based on the financing structure proposed, we believe leverage would decline from the low 5 times debt-to-EBITDA estimated for Charter following its Comcast-TWC transactions. Charter reported leverage of 4.6 times debt-to-EBITDA for 2014 on a standalone basis (incorporating Moody's standard adjustments and excluding debt raised to fund the Comcast-TWC transactions). We believe Advance/Newhouse Partnership (A/N), the current owner of Bright House, has historically maintained a more conservative credit profile than Charter. The addition of directors nominated by A/N could bring a more conservative voice and voting block to Charter's board, although Liberty Broadband will still exercise up to 25% voting power, and we expect this group to favor aggressive use of leverage.

The previously announced Comcast-TWC transaction creates execution risk, and acquiring more assets at the same time adds to the challenge. For example, switching all operations to a new management team and a new brand and migrating from one billing system to another could lead to disruption both internally and for customers, which could result in extra costs and customer losses. Bright House currently has a management services agreement with TWC, and therefore uses the same billing systems and has familiarity with TWC, which could smooth the integration. Nevertheless, Charter's footprint will be expanding from 4.3 million video customers to 7.6 million, or 10.1 million including the GreatLand

Connections assets Charter will be managing. While we consider the greater scale positive, the sheer number of new systems and subscribers will require immense attention to countless complicated operating details.

We expect the deals to be accretive to free cash flow, but the cash dividend on the proposed preferred units will add a fixed charge akin to interest expense. Also, Charter will likely assume a tax liability which could have a balloon payment to A/N. Given the potential debt attribution for these considerations as well as other Moody's standard adjustments, we expect leverage as defined by Moody's to exceed the pro forma 3.9 times debt-to-EBITDA referenced by Charter but be below the 5.2 times we estimated for Charter pro forma for its Comcast-TWC transactions.

Bright House Networks operates cable systems in five states including Florida, Alabama, Indiana, Michigan and California and serves approximately 2.5 million customers. Bright House Networks also owns and operates local news and sports channels in its Florida markets. Its annual revenue is approximately $3.8 billion.

One of the largest domestic cable multiple system operators serving approximately 4.3 million residential video customers (6.2 million customers in total), Charter Communications, Inc. (Charter) maintains its headquarters in Stamford, Connecticut. Its annual revenue is approximately $9.1 billion.

On April 28, Charter announced an agreement with Comcast Corporation (Comcast) whereby Charter will acquire approximately 2.9 million former Time Warner Cable (TWC) subscribers. Charter will also acquire an approximately 33% ownership stake in a new publicly-traded cable provider (GreatLand) to be spun-off from Comcast serving approximately 2.5 million customers.



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