Charter Communications agreed to acquire Bright House Networks, the sixth largest cable operator in the United States with 2 million video customers in Florida, Alabama, Indiana, Michigan and California.

The shares of Charter Communications were trading  $197.98 per share, up by almost 8% around 11:35 A.M. in New York.

Charter Communications

Details of the agreement

Charter Communications agreed to pay $10.4 billion to acquire Bright House Networks from its parent company, Advance/Newhouse Partnership.

Under the agreement, Charter Communications will own 73.7%, and Advance/Newhouse will own 26.3% of the new Partnership (New Charter).

New Charter and Advance/New House will establish the Partnership utilizing an existing subsidiary of Charter Communications Holding Company, LLC. New Charter will contribute 100% of its assets into the Partnership. Advance/Newhouse will contribute 100% of the assets of Bright House into the Partnership.

Advance/Newhouse will receive payment from New Charter in the form of $2 billion in cash and governance rights reflecting its economic ownership in the partnership. It will also receive $5.9 billion of exchangeable common partnership units, and $2.5 billion of convertible preferred partnership units which will pay a 6% coupon.

Advance/Newhouse can exchange its common and convertible preferred partnership units into Class A common stock of New Charter, which is priced at $173 per share (negotiated reference price). According to Charter Communications, the 10.3 million partnership units will be convertible at $242.19, a 40% to the reference price.

The transaction is still subject to regulatory approval and several conditions including approval from the shareholders of Charter Communications, and the expiration of Time Warner Cable’s right of first offer for Bright House. Another condition is the closing of the previously announced deal with Comcast.

Acquisition enhance Charter Communications’ scale

In a statement, Charter Communications President and CEO Tom Rutledge said the acquisition provides the company with important operating, financial and tax benefits as well as strategic flexibility.

“This acquisition enhances our scale and solidifies New Charter as the second largest cable operator in the US,” added Rutledge.

On the other hand, Bright House Networks CEO Steven Miron said, “We share the same vision for the future of our business as Tom and the Charter leadership team, which is to gain market share by offering customers competitive products and excellent service at a tremendous value…We think the combination with Charter gives our employees, our customers, and Advance/Newhouse the strongest prospects for the future.”

Agreement with Liberty Broadband

Charter Communications also disclosed that Liberty Broadband Corporation agreed to buy $700 million of newly issued shares of New Charter at the reference price after the closing of the Bright House transaction.

Liberty Broadband’s equity ownership will represent 19.4% of the outstanding common shares of New Charter. Advance/Newhouse agreed to grant Liberty Broadband a voting proxy on its shares, capped at 6% for five year after the closing of the deal. Its expected voting power is 25.01%.