Fox News is the latest cable network to file suit against Charter Communications, claiming the cable operator is trying to force programmers to accept lower affiliate fees tied to old deals with Time Warner Cable.
This is the second such lawsuit filed against Charter in about two weeks. On July 8, Spanish language broadcaster Univision filed a similar lawsuit in New York, claiming that Charter was trying to pay for carriage of its networks under the lower Time Warner Cable rate.
Charter completed its acquisition of Time Warner Cable and Bright House Networks on May 18, a deal that bolstered Charter’s overall cable subscriber rolls from about 4 million to more than 17.3 million. Time Warner Cable had been the second largest cable operator in the country prior to the deal, with about 11 million video customers.
Part of the reason for the deal was the programming cost synergies larger scale brings. Charter has identified about $800 million in overall cost synergies from the mergers, including about $400 million in savings due to lower programming rates.
According to the Fox suit, Charter has insisted on paying the lower Time Warner Cable rate for Fox News Channel for all of its systems, not just the ones in the former company’s service territory.
Fox claims that it entered into the Charter carriage deal in January 2014, and that the agreement covers systems that Charter would subsequently acquire. That carriage deal, according to the suit, expires on Aug. 31, 2018.
Charter had been pursuing Time Warner Cable since 2013, but around the time of the Fox deal, it had been bested by Comcast Corp., which in February 2014 agreed to purchase TWC for about $67 billion. As part of that deal, Comcast and TWC would swap and sell systems to Charter with about 4 million subscribers. According to the Fox suit, its Charter deal specifically stated that any systems acquired by Charter after that time would fall under the original Charter deal.
But a lot has changed since January 2014. Comcast abandoned its TWC deal in April 2015 and Charter stepped in about a month later, agreeing to a transaction valued at about $78.7 billion.
Charter, the suit says, asserts that it should pay the TWC rate because Time Warner Cable was the surviving entity after the merger, not Charter. In a letter to Fox, Charter EVP and general counsel and corporate secretary Richard Dykhouse said Spectrum Management Holding Co. LLC is a Time Warner Cable Company that owns and manages the systems under the Fox News affiliation agreement.
“We appreciate that, as publicly reported, the Transactions were not self-explanatory,” Dykhouse wrote.
Fox asserts that Charter is the surviving entity of the merger, pointing out that none of TWC’s former senior executives – save one, EVP of Business Services Phil Meeks – transitioned to the new company and that Charter itself on several occasions in public documents stated that it was purchasing TWC.
In a blog post Wednesday, BTIG analyst Richard Greenfield wrote that the Fox and Univision lawsuits raise issues that need to be resolved.
“We are now wondering whether Charter was too optimistic about its programming cost-savings opportunities with investors or whether broadcasters/programmers misunderstood how the complex structure of a dramatically enlarged Charter could hurt them,” Greenfield wrote.
Barclays Capital research analyst Kannan Venkateshwar noted that if Fox and Univision prevails, it could mean that all of Charter’s 17.3 million customers would fall under old Charter’s more expensive rate card.
“In other words, instead of programming synergies, programming costs would actually step up if the court rules against Charter in these disputes,” Venkateshwar wrote. “We are not qualified enough to opine on the likelihood of success of one claim vs another but the issue itself appears likely remain front and center for investors over the rest of this year. Given the disputes, it remains to be seen if Charter has to tweak its upfront synergies during the period of these disputes, in case there is no agreement.”