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Last updated: January 14, 2014 1:51 am
A battle for the future of the US cable industry burst into the open on Monday as Charter Communications went public with an offer for Time Warner Cable worth $61bn including debt, only for its larger rival to reject its advances as “grossly inadequate”.
Backed by John Malone’s Liberty Media, Charter has circled Time Warner Cable since last summer, publicly advocating for consolidation in an industry battling new competition, new technology and shifting consumer habits.
On Monday, it made public the terms of its pitch, detailing a cash and stock offer that values its target at $132.50 per share and saying that Time Warner Cable had repeatedly refused to engage in discussing a deal for more than six months until executives of the two operators met in December.
During that December meeting, Charter made an offer “in the low $130s”, it said, after the rejection of previous proposals in June and October.
Time Warner Cable responded by saying that it was not seeking to sell the company but was open to a deal at a price of $160 per share, or eight times earnings before interest, taxes, depreciation and amortisation. It called Charter’s three approaches, at $114, $127 and $132.50, “a non-starter” at seven times ebitda and a significant portion of the price in Charter stock.
Monday’s offer comprised cash worth $83 per share and Charter stock valued at about $49.50. Time Warner Cable’s shares closed at $132.40 on Monday.
Charter’s market capitalisation stood at $14bn on Monday, with Time Warner Cable at $34bn. Including debt, a Time Warner Cable takeover could cost Charter more than $60bn.
Time Warner Cable shareholders would own about 45 per cent of the combined entity, which would be the second-largest US cable operator behind Comcast with 16m video and broadband subscribers, according to analysts.
“We have reservations about the value of Charter stock. Our objective, essentially, is to maximise the amount of cash in any deal so that we aren’t subject to the vagaries of their stock price,” Rob Marcus, Time Warner Cable chief executive, told the Financial Times.
He said that Time Warner Cable’s position reflected shareholders’ opinion.
“Our house wasn’t for sale, somebody knocked on our door and made a low-ball proposal. They didn’t just do it once, they did it three times,” he said. “It is obvious that what they are trying to do here is buy a premium asset at a bargain-basement price.”
Our house wasn’t for sale, somebody knocked on our door and made a low-ball proposal. They didn’t just do it once, they did it three times. It is obvious that what they are trying to do here is buy a premium asset at a bargain-basement price
- Rob Marcus, Time Warner Cable chief executive
Tom Rutledge, Charter chief executive, told the FT that Time Warner Cable’s demand was an “unrealistic price expectation . . . designed to be dismissed” given that Time Warner Cable’s shares have soared nearly 40 per cent on deal speculation in the past six months.
He added that several Time Warner Cable shareholders had approached Charter, endorsing a deal and asking Charter to ratchet up its efforts.
“We’re really trying to engage the shareholders of Time Warner Cable because we haven’t been able to engage the management and the board,” Mr Rutledge told the FT. “This is an offer that we think is quite compelling and creates tremendous value for Time Warner Cable and for Charter.”
Mr Rutledge said that in addition to the synergies and tax benefits that Charter would bring to a deal, its executives had the “skill and proven track record” to help Time Warner Cable stem customer losses and improve services.
He pointed to the fact that Time Warner Cable had lost more than 500,000 video customers during the second and third quarters of 2013 as well as broadband and voice customers. Charter, meanwhile, lost 82,000 video customers during the same period and gained broadband and voice customers.
“The track record they are on is quite evident,” Mr Rutledge said. “There is tremendous upside growth potential, and they get to ride that upside.”
Mr Marcus said that Time Warner Cable’s business started to improve in December and is on a positive track for 2014. “We have confidence in our own ability to create value,” he said.
The deal comes after Liberty Media, Charter’s largest shareholder, proposed earlier this month to make satellite radio broadcaster Sirius XM a wholly owned subsidiary in a deal that could give it more resources to fund the Charter-Time Warner Cable deal.
We’re really trying to engage the shareholders of Time Warner Cable because we haven’t been able to engage the management and the board
- Tom Rutledge, Charter chief executive
Liberty said it supported Charter’s efforts and had been “encouraged by Time Warner Cable shareholders to pursue this opportunity”.
Some analysts have cautioned that a combined Charter-Time Warner Cable would be highly leveraged and leave little margin for error. Others have cautioned that Charter should be careful given its 2009 bankruptcy, blamed on heavy debt and under-investment.
Mr Rutledge dismissed analyst concerns about high levels of leverage, noting that financing was fully negotiated.
Charter is taking its pitch to investors, with plans for a conference call with analysts on Tuesday afternoon.
Financial advisers to Charter include Goldman Sachs, LionTree Advisors and Guggenheim Securities. BofA Merrill Lynch, Credit Suisse and Deutsche Bank Securities are also financial advisers to Charter, and with Goldman Sachs are leading financing for the deal. Law firms Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis LLP are also representing Charter.
Advisers to Time Warner Cable include Morgan Stanley, Allen & Company and Citigroup, as well as Paul, Weiss, Rifkind, Wharton & Garrison as legal counsel.
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