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Looks like Charter, talks like Charter, negotiates like Time Warner Cable

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Looks like Charter, talks like Charter, negotiates like Time Warner Cable

People who thought they knew what to expect from thecombination ofCharter CommunicationsInc. and Time WarnerCable Inc. may have been wrong.  

In the last few weeks, two network owners have filedlawsuits againstCharter alleging breach of contract and fraud. In both suits, the networkowners — Univision HoldingsInc. and 21st CenturyFox Inc.'s Fox News Network LLC — say their contracts with legacyCharter had been specifically drafted to cover any acquisitions or mergers. Andin both cases, the suits allege new Charter has disregarded those agreements.

"To avoid the clear application of the Charteragreement, which has higher rates than Fox News Network's contracts with TWC,Charter is claiming that TWC was the party that survived the acquisition andthat TWC's contracts with Fox News Network survive as a result," Fox NewsNetwork wrote in its July 19 suit.

Univision, in a July 8 lawsuit, argues much the same thing.  

The legal question seems to hinge on whether theCharter-Time Warner Cable transaction was a merger or acquisition and theprecise terms of the combination.

In their lawsuits, Fox News and Univision say there is ampleevidence to show that Charter acquired Time Warner Cable, including the factthat new Charter's management team is made up almost entirely of legacy Charterexecutives.

"Charter's position that TWC acquired Charter is aruse," Fox News said.

Charter, for its part, said in a June to Fox News that, as publiclyreported, its "transactions were not self-explanatory" and so certainmisperceptions may exist. Nevertheless, Charter said, after the closing of thedeal, the surviving entity, Spectrum Management Holding Co. LLC, is a TimeWarner Cable company. Thus, Time Warner Cable rates and contracts now apply.

BTIG LLC analyst Rich Greenfield said in a July 20 blogpost that it is difficult to know which side is right.

"We have been under the impression that Charter boughtboth Time Warner Cable and BrightHouse Networks LLC," he said, adding that after the lawsuits,he reviewed Charter's original proxy statement and investor presentation inrelation to the transaction, and both documents "talk extensively about'Charter' buying Time Warner Cable and Bright House with no mention of[Spectrum Management Holding Co. LLC]."

On the other hand, a May 24 does mention Spectrum andindicates that the combination of Charter and Time Warner Cable was effectedthrough a series of smaller mergers. According to this filing, Greenfield saidthat from a programming standpoint, new Charter "is not one enlarged MVPD,but rather continues to operate as two smaller legal entities."

"We have no idea who is right legally," Greenfieldsaid, noting that Charter's "complex corporate structuring" might beenough to "get around programmer clauses specifically designed to preventprogramming cost savings." But it is also just as likely that the courtswill hold the same view as Fox News and Univision — namely, "that newCharter is, for the purposes of interpreting these programming contracts, thesame Charter (if it walks like a duck and quack likes a duck, it's a duck),"said Greenfield.

Given the amount of legal and regulatory scrutiny theCharter-Time Warner Cable deal attracted, it is hard to understand how therecould still be surprises attached to it. But Nathan Miller, assistant professorat Georgetown's McDonough School of Business, noted that when economists are consideringdeals, they are not looking into this kind of legal minutiae.

"If you're thinking about how the merger is likely toaffect broader outcomes in the cable market, it probably doesn't matter so muchwhether these two companies are controlled by the ownership of Time WarnerCable or the ownership of Charter or whether it's a merger, and so it's a wholenew company operated by a combination of executives. We still think of themacting to maximize their own joint interest," Miller said in an interview.

He added: "For a lawyer, there is going to be a lot oflegal work to get the details of the contract right. That's where there startsbeing a meaningful distinction."

However it happened, the timing of the lawsuit issignificant for Fox News Network. The suit was filed just two days before RogerAiles resigned aschairman and CEO of both FOXNews Channel (US) and FOX Business Network (US), leaving Rupert Murdoch toserve as chairman and acting CEO of the networks.

The news came after former anchor Gretchen Carlson accusedAiles of sexual harassment.

Pivotal Research analyst Brian Wieser said in an interviewthat the exit of Ailes creates "a power vacuum" at FOX News and couldpossibly result in the loss of certain on-air personalities, such as BillO'Reilly and Sean Hannity.

Despite the difficult times within FOX News, it would be amistake to view the network as vulnerable, Wieser said, describing it in arecent research report as "one of the most important media properties inthe industry."

According to data from SNL Kagan, an offering of S&PGlobal Market Intelligence, FOX News is distributed to about 91 millionsubscribers and earns monthly affiliate revenue of $1.41 per averagesubscriber. Its cash flow margin tops 64%.

By comparison, CNN (US) earns monthly affiliate revenue of 71 cents peraverage subscriber — roughly half of what FOX News earns — while earns only 26cents per average subscriber per month.

Wieser described FOX News as "a ratingsjuggernaut," especially among older viewers.

"Certainly, for the viewers that they've cultivated,it's not as if they are going to all of a sudden start watching MSNBC tomorrow.Even if half the talent walked off the air, I don't think you'd see a hugedifference in viewing," Wieser said in an interview.

For this reason, he doubts that Charter would want thecurrent legal dispute over programming fees to result in FOX News being dropped.

"As a practical matter, MVPDs would be reluctant todrop such a heavily watched network among a large enough group of people,"the Pivotal Research analyst said.