The largest broadband company in the world will be created after AT&T, the US telecoms company, agreed to merge its cable television business with rival Comcast in a $72bn (£50bn) deal.

The deal, struck late on Wednesday, ended a five-month auction which attracted all the leading players in the US cable industry. The $120bn new company, AT&T Comcast, will have about 22m customers. Each firm agreed to pay the other $1.5bn if either walks away from the deal.

American cable TV has been transformed from a highly fragmented market with thousands of operators to one dominated by five companies. Next largest is Time Warner Cable, which has 12.7m subscribers, followed by Charter with 6.9m and Cox with 6.2m.

The merger is part of the continuing break-up of AT&T announced in October last year. The company reiterated plans to issue a tracking stock for its consumer telephony business, leaving AT&T as a focused business services provider.

The auction of the cable business, AT&T Broadband, began in July after Comcast made an unsolicited offer. AT&T rejected the bid but said it would explore "financial and strategic alternatives" - effectively putting the division up for sale.

Comcast will issue $47bn in shares and assume $25bn of AT&T debt. The price values each AT&T cable customer at $4,500. Comcast was backed in part by Microsoft.

AT&T Comcast will have a significant presence in 17 of the 20 largest metropolitan areas in the US. The aim will be to roll out high-speed data and phone services to more cable TV customers - the so-called "triple play" of television, the internet and telephony.

C Michael Armstrong, chairman and chief executive of AT&T, said: "This is a leap forward in realising a vision that thousands of AT&T people have worked toward - bringing together affordable broadband TV, voice and data."

Ralph Roberts, chairman of Comcast, described the agreement as a "once in a lifetime opportunity".

Analysts said the merger should not face too many obstacles in Washington.