Charter, backed by billionaire John Malone's Liberty Media Corp, had been pursuing Time Warner for months, but was not making any headway as its larger rival - nearly three times its size by market value - asked for $8 billion more than what it had offered.
But Comcast actually believed Time Warner Cable's $160 per share counter to Charter's $132.50 per share bid was reasonable, several people familiar with the situation said on Thursday. At the same time, it worried that splitting a public company with assets in multiple markets and millions of subscribers would be tough, made even harder by the acrimony that had built up over the past eight months between Charter and Time Warner Cable.
On Feb. 4 Comcast and Charter met in a last-ditch attempt to see if they could work out their differences, the sources said. They could not.
So later in the day, Comcast Chief Executive Brian Roberts called Time Warner Cable's Rob Marcus to say that he was ready to make a bid for all of Time Warner Cable at a figure close to the asking price, according to the sources.
On Thursday, the two announced a $45.2 billion all-stock deal to create a cable behemoth, with an empire stretching from New York to Los Angeles. The deal is the largest M&A transaction so far this year and the third-largest in the media and entertainment sector of all time, according to Thomson Reuters data.
If the deal closes, it could give Comcast unprecedented leverage in negotiations with content providers and advertisers. For that reason it is also likely to come under keen regulatory scrutiny.
Representatives for Time Warner Cable, Comcast and Charter declined to comment on details of the negotiations. All the sources asked not to be named because the conversations were private.
Interviews with several people who were intimately involved in negotiations, however, paint a picture of what went on behind the scenes over the last few days as the deal came together and how Charter lost a prize that it had worked so hard to win.
In some ways, these sources said, the two companies have Charter to thank for the deal. Although Comcast, the top U.S. cable operator, had always been intrigued by the idea of buying Time Warner Cable, a deal was not on its list of priorities until Charter put it in play last summer. In the end, one of the sources said, all Charter did was "wake up the sleeping beast."
John Paulson, whose Paulson & Co hedge fund is one of Time Warner Cable's top 10 shareholders, said of Comcast in an interview with Reuters: "They're gentlemen, old school businessmen. But they're also aggressive."
Charter's next steps were not clear on Thursday. It had nominated a slate of directors to replace the entire board of Time Warner Cable on Tuesday, but was kept in the dark as its prize was slipping away to another buyer.
Time Warner Cable CEO Marcus, in the job for just 44 days, said in an interview that the deal, while good for his shareholders, is bittersweet for him.
"I was looking forward to thousands of days, not tens of days doing this job," Marcus said.
Still, the former Paul, Weiss, Rifkind, Wharton & Garrison LLP M&A lawyer who over the past eight years had served in various roles at Time Warner Cable, including its top dealmaker and chief operating officer, just pulled off one of his largest deals ever. And thanks to his tenure at the company, he could take home some $50 million after it closes.
"Sometimes you don't have control over how things unfold," Marcus said.
THE FINAL DAYS
Things moved quickly over the last 10 days, the sources said.
After months of pursuing Time Warner Cable without success and speaking informally with Comcast last year, Charter approached Comcast once again in the middle of January about teaming up.
The idea was for Charter to buy all of Time Warner Cable and later sell off select systems to Comcast.
Comcast, with a $138 billion market value, dwarfs Charter's $13.43 billion, as well as Time Warner Cable's $40 billion market capitalization as of Thursday.
But as the two discussed options, Comcast became increasingly uncomfortable with Charter's hostile approach and more skeptical that Charter would be able to win Time Warner Cable's blessing with its offer, the sources said.
Comcast also became increasingly excited about the prospect of buying Time Warner Cable on its own.
Comcast felt that it could pay between $150 and $160 per share for Time Warner Cable, the sources said.
Initially it was also willing to put cash along with stock into the deal. But one of the sources said Time Warner Cable wanted an all-stock deal and for Comcast to use the cash instead to initiate a large share buyback program after the transaction closed to boost the share price of the combined company.
That meant Time Warner Cable shareholders would end up owning 23 percent of the combined company and also not have to pay taxes as a result of the transaction.
In return for paying the price, however, Roberts had one demand: Comcast would not pay a reverse break-up fee, or the penalty that a buyer pays to the seller if it fails to close a deal, typically because of regulatory reasons, the sources said.
The request was unusual for a deal that was sure to face regulatory scrutiny. A few years ago, for example, AT&T Inc agreed to pay as much as $6 billion as reverse breakup fee, paid in cash and spectrum, as part of its deal to buy T-Mobile USA from Deutsche Telekom for $39 billion. The deal was shot down by regulators, and AT&T had to pay the fees.
Some lawyers said such fees are rare in the cable industry, however.
"These businesses operate fairly independent enough and if this deal does not get approved, there is not going to be that much damage to Time Warner Cable," said Robert Townsend, co-chair of Morrison & Foerster's global M&A practice.
Comcast CEO Roberts said he did not recall ever agreeing to a reverse termination fee, not even in its $30 billion buyout of majority of NBC Universal in 2009.
Time Warner Cable's board determined that the proposed transaction should get regulatory approval because the companies do not operate in the same markets, the sources said. They agreed to Comcast's condition.
Talks were further aided by the fact that executives from the two companies knew each other and were friendly, the sources said. They also had worked together on a deal previously.
In 2006, the two split up bankrupt cable operator Adelphia Communications in a complicated $17.6 billion transaction. Marcus was Time Warner's lead negotiator on the deal at that time.
This time around, the two chief executives, along with Comcast Chief Financial Officer Michael Angelakis and Time Warner Cable's Arthur Minson, negotiated key points of the deal by phone as well as in-person meetings in New York, without relying much on advisers.
The two sides agreed a final deal price of $158.82 per share on Monday morning, and the board of each company approved the transaction on Wednesday evening.
"Throughout the whole process with Charter, I consistently said one thing - insufficient value. They didn't value the unique asset that was Time Warner Cable," Marcus said. "On the simplest level, the TWC-Comcast merger was superior."