When Liberty Media (NASDAQ:LMCA)(NASDAQ:LMCB)-owned Charter Communications (NASDAQ:CHTR) made public its interest in Time Warner Cable (NYSE:TWC) through a letter to Chair and Chief Executive Officer Rob Marcus, there were indications that any acquisition discussions could be slightly acrimonious in nature. Charter’s $37.4 billion cash-and-stock bid, which valued the second-largest U.S. cable provider at $132.50 per share, was unequivocally rejected by the company’s Board of Directors, with Marcus calling the offer “grossly inadequate.” That dismissal prompted Charter Communications to launch a verbal attack on Time Warner Cable during a Tuesday conference call, an assault that claimed Time Warner Cable was a troubled asset with bad leadership and horrible customer service. However, Charter also expressed its eagerness to buy the company.
Time Warner Cable publicly turned down the offer from Charter in a press release dated January 13, and Charter’s conference call with analysts did little to change the belief that the bid significantly undervalued the company. “There was nothing in Charter’s presentation and call today that changes the fact that its proposal is grossly inadequate. We have engaged with Charter, but Charter is not prepared to pay for a one-of-a-kind asset that Tom Rutledge referred to today as the biggest and best M&A option available. We are confident in our standalone plan and we are not going to let Charter steal the company.” As Marcus stated in that Monday press release, his goal is not so much selling the company but “maximizing shareholder value,” and for that reason, he said the board would not accept an offer of less than $160 per share, consisting of $100 in cash and $60 per share of Charter common stock.
He believes Time Warner Cable is a one-of-a-kind asset because it is “the only large pure-play, non-family controlled cable operator in the United States, with 15 million customers in some of the country’s best markets.” Marcus described the company’s network as “robust,” and noted that it is in the process of “enhancing the capacity of that network” to include faster data speeds and advanced multi-platform video offerings. “In short, we’re in a great business and confident we have the right assets, the right people and the right strategic plan to deliver great experiences to our customers and create significant value for our shareholders,” he said. According to Marcus, the Charter offer represents “an EBITDA multiple of approximately 7X, well below past transactions in the cable sector.”
For Charter Communications, the call was part of an attempt to convince Time Warner Cable shareholders that it could better run the company and that its offer was fair, assertions that the Time Warner Cable executives have rejected on multiple occasions. While the January 13 proposal was the first public offer made by Charter, the company has expressed its interest to Time Warner executives twice before.
“As you know, I believe we have a significant opportunity to put our companies together in a way that will create maximum, long-term value for shareholders and employees of both companies,” wrote Rutledge. “As you know, Time Warner Cable quickly rejected our proposals in June and October, and refused to engage until we met in December. I communicated a willingness to submit a revised proposal in the low $130s, including a cash component of approximately $83.” However, surprising Rutledge, who believed Time Warner’s Board of Directors “would recognize the significant value of this combination and engage,” the offer was not met positively. Instead, the company’s management suggested a counter offer, with an “unrealistic price expectation” that ignored the 39 percent premium “already reflected in Time Warner Cable’s stock (as of last Friday),” he added.
By making this offer public, Charter — the fourth largest U.S. cable provider — is seemingly trying to draw in Time Warner shareholders, who can put pressure on the company’s board to negotiate a deal. “Our intent is to talk to Time Warner Cable shareholders and convince them that putting together the companies, fixing [Time Warner Cable’s] customer service issues and getting the company back on a growth trajectory will create enormous value for shareholders,” Rutledge said in an interview with the Wall Street Journal. However, Charter will not increase its offer if it is turned down, he added.
Even though Time Warner’s CEO said the proposal was a “non-starter” because it “substantially” undervalued the company, Marcus is under pressure to boost the company’s operating performance. Time Warner is lagging behind its main competitor — Comcast (NASDAQ:CMCSA). As Charter’s top executives emphasized during the conference call, Time Warner’s executives have “failed.” As proof, Charter pointed to the fact its customer surveys ranked its service dead last in three of the country’s four regions, according to J.D. Power.
“When you think about what’s been going on, since we started talking to Time Warner Cable they’ve lost more than a half million customers. It’s a troubled situation,” explained Rutledge in an interview with CNBC. “And we think when you look at the cash component that we’re bringing, when you look at the appreciation that we’ve already put into the stock through this process, and you think about the fact that as part of our offer, which is not an all-cash offer, 45 percent of the company will still be owned by Time Warner shareholders, so those shareholders are going to participate in the synergies that we deliver,” he added. Annual cost savings are expected to amount to $500 million initially, and then grow to $750 million over time, Charter’s investor presentation noted. Still, the combined company may also have to do “swaps and divestitures” to make certain regions more efficient.
Charter argued that its management could orchestrate a turnaround of its larger rival. The company — and its largest shareholder, Liberty Media — have made that claim before, but at no other time was their criticism as harsh as it was on Tuesday. “This negative momentum isn’t simply result of an operating plan over the last year, it is the failed plan over the past half decade,” said Charter’s Chief Operating Officer John Bickham, according to Reuters.
Bickham said the problem is that Time Warner Cable has not invested enough in the company to allow it to out-compete rivals in the transition to digital technology. To ignite a turnaround, Charter’s presentation detailed how it would accelerate Time Warner Cable’s customer and cash-flow growth, boost margins, and roll out higher Internet speeds. If Time Warner Cable does not make a deal, Carter claims that the company’s share price will decline. “Absent a serious M&A alternative, TWC faces significant potential share price downside,” the company stated. Time Warner’s stock price has soared since merger speculation began, rising from around $90 per share to the $130-per-share range in the past six months.
Despite Rutledge’s insistence that Charter would make no other offer for Time Warner and the $160-per-share price target set by Marcus, Jefferies analyst Mike McCormac believes the acquisition will still happen, at a price of approximately $150 per share. After all, cable television providers are rushing toward consolidation. That trend has little to do with television. Rather, what is at issue, is cable, and the importance of that infrastructural assets is clear in the attention that Wall Street is paying the possible acquisition of Time Warner Cable. For the telecommunications companies that were once powerhouses of the cable television world, cable is the infrastructural asset that will carry them into the future. One of the main advocates for industry consolidation is Liberty’s Chair John Malone, which is one reason why Wall Street expected Charter to submit an offer for Time Warner Cable for a long time.
Including the company’s $24 billion in debt, the deal would cost Charter a total of $61.4 billion. The combined company would have to take on $20.5 billion in new debt, amounting to $72.16 per share, which would bring it to a leverage ratio of 4.8 times to five times.
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