Will Comcast Join Charter in Dismantling Time Warner Cable?

If Time Warner Cable (NYSE:TWC) is ever acquired, the story of that acquisition will be a convoluted one. When rumors of a possible acquisition were gaining momentum in the later half of 2013, Comcast (NASDAQ:CMCSA) was often included, along with Charter Communication (NASDAQ:CHT), in lists of companies interested in securing Time Warner Cable’s infrastructural assets and its customers. Charter’s desire to acquire its much-larger rival was finally made public earlier this week when the company’s President and Chief Executive Officer Tom Rutledge sent a letter to Time Warner Cable’s Chair and Chief Executive Officer Rob Marcus. While Charter’s $37.4 billion cash-and-stock bid was rejected, the company has not given up its aspirations, and Comcast could play a role in its latest acquisition bid.

Through individuals familiar with the cable provider’s plans, Reuters learned Charter approached Comcast Wednesday with the intention of discussing a partnership that would allow the two companies to divide the infrastructure and customers of Time Warner Cable — the second-largest cable provider in the United States. According to the publication’s sources, Charter, which is the fourth largest cable provider, and Comcast, the largest provider, have begun to work out the terms of permanent alliance. One possibility is that Charter purchases all of Time Warner Cable and then sells some subscribers and markets to Comcast. That option would make the acquisition less of a burden to Charter’s balance sheet; the market capitalization of Time Warner is nearly twice that of Charter.

While the company’s investor presentation detailing the benefits of the deal noted that synergies will result in annual savings of $500 million — and grow to $750 million over time — Charter would have to take on as much as $20.5 billion in new debt to finance the deal. That debt would amount to $72.16 per share, which would bring the company to a leverage ratio, a measure of how much debt Charter has on its balance sheet, of 4.8 times to five times. To ease the burden on the company’s balance sheet, Charter could implement “swaps and divestitures” to make the regions it serves more efficient, according to one of the slides in the presentation. In the event the two companies ink an agreement, certain geographic markets would be sold to Comcast, as the company is not interested in doing swaps. However, at this time, it is not clear which markets are under discussion. Likely, Comcast is most interested in Time Warner Cable’s largest markets — New York, Los Angeles, and Dallas.

A similar discussion was held between Charter and Comcast last year, but no terms were settled. Another benefit of the deal is that it would take Comcast out of the bidding for Time Warner. But there is a problem; Charter’s $37.4 billion cash-and-stock bid, which valued the cable provider at $132.50 per share, was unequivocally rejected by the company’s Board of Directors, with Marcus calling the offer “grossly inadequate.”

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,” Marcus wrote. “We have engaged with Charter, but Charter is not prepared to pay for a one-of-a-kind asset that [Charter Communications President and Chief Executive Officer] 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 was 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 the company 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.”

Time Warner shareholders would likely accept an offer of between $145 to $150 per share from Liberty Media (NASDAQ:LMCA)(NASDAQ:LMCB)-backed Charter, Reuters reported. Even though Time Warner’s CEO said the proposal was a “non-starter” because it “substantially” undervalued the company, Marcus is under pressure from shareholders to boost the company’s operating performance. Currently, Time Warner is lagging behind its main competitor — Comcast.

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, consolidation that Liberty Media Chair John Malone advocates. 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.

Liberty Media, which owns 27 percent of Charter, has not offered to invest further in the cable company, but sources told CNBC that could be a possibility, after all, the consolidation of the industry is Malone’s pet project.

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