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Charter Surges on Comcast Deal, But Will It Appease Regulators?

NEW YORK (TheStreet) -- Charter Communications  (CHTR) was surging Monday after cutting a deal with Comcast (CMCSA) to acquire 1.4 million existing Time Warner Cable (TWC) customers for roughly $7.3 billion in cash.

Philadelphia-based Charter and St. Louis-based Comcast will another swap another 1.6 million subscribers, and then create a holding company for another 2.5 million subs, an entity which Charter would hold a 33% stake while Comcast held the remainder.

The various transactions are all contingent on Comcast closing its $45 billion acquisition of New York-based Time Warner Cable.

Charter was gaining 7.8% to $140.15, as investors applauded a transaction that allows Charter to expand its subscriber base without having to engineer a costly and time-consuming merger. For Charter, which so far has failed in its effort to acquire Time Warner Cable, the deal represents a very nice consolation prize and the prospect of becoming the country's second-largest cable-TV provider.

As for Comcast, which also owns NBCUniversal, the horse trading is all about trying to appease regulators who are being pressured by consumer advocates, as well as companies such as Netflix (NFLX), one the largest users of broadband, to reject the deal.

Comcast has been keen to convince the public and the Federal Communications Commission that its footprint isn't really that big, and that worries about that Time Warner Cable deal would create an anti-competitive market for pay-TV are unfounded.

In its public interest statement, Comcast insists that outfits like Amazon (AMZN) Prime and Microsoft (MSFT) are beefing up their video offerings, thereby creating formidable challenges to Comcast's cable-TV bundle. (Comcast issued that statement before Amazon announced a deal with Time Warner's (TWX) HBO to carry some of its non-first run programming.) Comcast lost 60,000 cable-TV subscribers in the first quarter, a trend which the company cites to support its argument that it's actually losing power rather than gaining it.

The bigger picture remains on broadband, which is where more households and more young people are going for entertainment, news and communication. It is around the issue of broadband where the FCC will determine whether a deal that allows Comcast, the country's largest high-speed broadband provider, to acquire Time Warner Cable, the third-largest, is in the public's best interest.

The deal would give Comcast control of broadband passing through "nearly two-thirds" of all U.S. households, according to a study by Harvard Professor Susan Crawford, author of "Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age."

Verizon's high-speed FiOS broadband service, different than the DSL-service that runs to most of its subscribers, would overlap with just 15% of territory held by a company combining Comcast and Time Warner Cable.

Comcast is betting that regardless of the future of the pay-TV bundle and Net Neutrality -- federal rules governing the Internet -- holding broad control on broadband connections into most U.S. households will generate a nice and tidy profit. For 2013, Comcast reported net income of $7.6 billion on revenue of $67 billion.

Comcast, which has had many great successes appeasing regulator concerns, is hoping the pending subscriber transaction with Charter will make it seem as though the company isn't a monopoly in the making.

--Leon Lazaroff is TheStreet's deputy managing editor.

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Leon Lazaroff is TheStreet's deputy managing editor.

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