Can Charter Trip Up the Comcast-Time Warner Cable Mega-Merger?



Sometimes, it can be hard to convince investors that mega-mergers will actually create value. This is because sometimes (often, really) mega-mergers don’t actually create value — they just cause a lot of headaches, make a select few people rich, and open the door to all sorts of unattractive corporate politics.

Cue Comcast (NASDAQ:CMCSA)(NASDAQ:CMCSK) and the $45.2 billion deal it wants to make for Time Warner Cable (NYSE:TWC). Comcast will purchase 100 percent of Time Warner in a stock-for-stock transaction, acquiring each of Time Warner’s 284.9 million outstanding shares for 2.875 shares of Comcast Class A common stock. Comcast’s normal Class A common stock, which trades under the CMCSA ticker, has fractional voting rights, whereas the special Class A common stock, CMCSK, has no voting rights. Comcast also has a non-publicly traded Class B stock, which has 15 votes per share and is controlled entirely by President and CEO Brian Roberts.

If the deal goes off without a hitch, Time Warner Cable shareholders will be left owning 23 percent of Comcast’s common stock. Roberts sweetened the deal by announcing a $10 billion share repurchase program to be conducted at the close of the transaction. Moreover, Roberts believes “there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x Operating Cash Flow.”

Comcast and Time Warner executives believe the deal will be accretive to cash flow and that they can squeeze about $1.5 billion in efficiencies from the combined entity — that is, executives believe that can pull off that rarest and neatest of tricks: creating value.

The veracity of this claim has been questioned by skeptics of the deal, but scale is a compelling argument. The new Comcast would have a full 30 percent of the U.S. pay television market (about 30 million subscribers) under its belt, and a presence in 19 out of 20 of the nation’s largest television markets.

“If” is an operative word, though. The proposed mega-merger has attracted no shortage of attention, much of it critical. Regulators have yet to sign off on the deal — although company executives are confident they will — and certain factions within the Time Warner Cable shareholder base are looking to extract an even sweeter deal from Comcast. A rival suitor, Charter Communications (NASDAQ:CHTR), has also complicated the matter.

Charter has made no less than four bids for Time Warner Cable, all of which were rejected for being too low. Its last and best offer was for approximately $130 per share, which compares to the approximately $159 per-share deal that Comcast put on the table. However, the problem with the stock-for-stock transaction is that Comcast stock has meaningfully declined since the deal was announced, effectively lowering the value of the offer on the table. Comcast stock is down nearly 4 percent since February 13, when the deal was announced.

If the stock continues to fall, Charter can lean on Time Warner Cable shareholders and tempt them with an alternative deal. A Time Warner Cable spokesperson told The New York Times, ”We are fully committed to our merger with Comcast, which we believe is in the best interests of shareholders,” but Charter appears committed to the game. The company hasn’t withdrawn its candidates for Time Warner Cable’s board of directors, and The Wall Street Journal reports that Time Warner Cable shareholders could be tempted with a more cash-heavy deal.

If the merger goes through, the new company would become the biggest, baddest provider in the country. According to data compiled by Bloomberg, at the end of 2013, the next-largest competitor, AT&T (NYSE:T), had 21.9 million video and broadband subscribers, and Verizon (NYSE:VZ) had 14.3 million.

The sheer size of the new entity has caused a lot of concern. Customers are clearly worried about the quality of their service. Both Comcast and Time Warner have earned a reputation as some of the worst in the country. They are the two worst-ranked businesses in the cable industry, according to the American Customer Satisfaction Index, and pretty much no one is expecting service to get better after the merger.