Time Warner Cable Calls Charter Offer ‘Grossly Inadequate’

Wall Street has waited with bated breath for months to see whether any major media company would make an offer for Time Warner Cable (NYSE:TWC) — the second largest United States cable provider, behind only Comcast (NASDAQ:CMCSA). Finally, an bid has been made; in a press release issued January 13, Liberty Media (NASDAQ:LMCA)-owned Carter Communications (NASDAQ:CHTR) announced that its President and Chief Executive Officer Tom Rutledge had sent a letter to Time Warner Cable’s Chair and Chief Executive Officer Rob Marcus, making his company’s interest in the rival cable provider public. As materials filed with the Securities and Exchange Commission detailed, Charter proposed a $37.4 billion cash-and-stock bid, which values Time Warner at $132.50 per share. Including the company’s $24 billion in debt, the deal would cost Charter a total of $61.4 billion.

Screen Shot 2014-01-14 at 11.01.21 AM

By making this offer public, Charter Communications — 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.

“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 counteroffer, 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.

In a statement released Tuesday, Time Warner Cable’s Board of Directors rejected the offer of $132.50 per share, a price Marcus called “grossly inadequate.” The CEO said the proposal was a “non-starter” because “it substantially undervalues [Time Warner Cable] and would represent an EBITDA multiple of approximately 7X, well below past transactions in the cable sector.” Of course, Marcus is under pressure to boost the company’s operating performance, as Rutledge, who worked at Time Warner until 2001, noted in his letter. Plus, Time Warner is lagging behind its main competitor, Comcast.

As its offer makes clear, Charter believes its management can run Time Warner more effectively, and by merging operations, the combined company could also benefit from cost savings. Even before Charter made its interest public, Marcus — who was at the time was still Time Warner’s chief operating officer —  told shareholders that he is the right man to decide whether to sell the company. Even more importantly, Bloomberg learned in December, through an anonymous source, that the company would probably accept a bid of between $150 to $160 per share. That price would value the company at as much as $45 billion, which, at the time, was about 21 percent above its market capitalization of 37.41 billion — a figure that had risen throughout the year as a result of the merger speculation. From June, when rumors of Charter’s interest first surfaced, Time Warner’s stock has soared more than 40 percent.

But, during a December interview with CNBC, Liberty Media’s Chief Executive Officer Greg Maffei said that he would be surprised if anyone made an offer of $150 a share to $155 a share for Time Warner. “I’d be surprised if there’s a buyer out there at that price,” he said. Despite Rutledge’s insistence that Charter would make no other offer for Time Warner and the fact Marcus named a $160-per-share price, 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.

The consolidation trend has little to do with television. Rather, what is at issue, is cable. 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, a future that will have little to do with linear, old-styled video, and much to do with media streamed from the Internet. Interest in cable television is dwindling and subscribers are cancelling.

The past year was the worst on record for the pay-television industry in terms of customer retention; according to research firm MoffettNathanson, 113,000 subscribers of pay-TV packages offered by cable, satellite, and traditional telecommunications companies canceled their service. For comparison, just 80,000 subscribers were lost during the 12-month period ended March 31, 2013. And, even that figure was concerning because it marked the first time a net, industry-wide subscriber loss had been recorded for a 4-quarter period since Leichtman Research Group began tracking the data a decade ago.

At the heart of the subscriber loss is the affordability and ease of Internet-based entertainment. Interest in Internet streaming services like Comcast-owned Hulu or Netflix (NASDAQ:NFLX), which give users access to a vast library of on-demand movies and television shows, have boosted demand for broadband. While cords may being cut on cable subscriptions, cable providers and telecommunication companies added over half a million high speed Internet customers in the third-quarter.

Declining subscriber numbers have yet to hurt providers’ bottom lines, but it is clear cord cutting is becoming a trend and cable companies are already well position for the change in the industry. They have the fastest route into a majority in the United States and a deep footprint throughout the country. Plus, if consolidation continues, cable companies, who are looking to meter broadband, will be able to create a more unified pay structure, thus stabilizing the market. One of the main advocates for industry consolidation is Liberty’s Chair John Malone, which is one reason why Wall Street has expected Charter to submit an offer for Time Warner Cable for a long time. Liberty purchased a 27 percent stake in Charter last year as a means to spark industry consolidation.

While the combination of Charter and Time Warner Cable would enable the combined company to save on programming costs and to take advantage of national advertising products, the total debt of the two companies would total around $64 billion. The cash portion of Charter’s offer will be financed by the $25 billion in debt the company arranged in recent weeks, as sources told the Journal.