Finance

Charter Lobs $61.3B Offer For Time Warner Cable

$132.50 Per Share Represents Tiny Premium For Second-Largest Cable Operator 1/13/2014 4:42 PM Eastern

After six months of speculation and no deal, Charter Communications decided to take their case to shareholders Monday, sending a letter to Time Warner Cable CEO Rob Marcus requesting that the two parties sit down and hammer out a deal.

Charter did not specify how much it would pay for TWC but a report in Bloomberg News, citing an interview with Charter CEO Tim Rutledge, said the deal was worth $61.3 billion, or about $132.50 per share.

If that is the case it would seem to be a low-ball offer, representing just a 10-cents per share premium to TWC’s closing price of $132.40 per share on Jan. 13.

Time Warner Cable immediately rejected the offer as inadequate, noting in a statement that it was the third unsolicited offer from Charter. Rob Marcus, Time Warner Cable’s chairman and CEO, said: “Charter’s latest proposal is a non-starter. First and foremost, it substantially undervalues TWC and would represent an EBITDA multiple of approximately 7X, well below past transactions in the cable sector. Indeed, our high-quality assets, unique scale, synergy potential, growth opportunities and strong financial position should command a premium valuation compared to precedent transactions, not the discount offered by Charter. Not only is the nominal valuation far too low, but because a significant portion of the purchase price would be in Charter stock, the actual value delivered to TWC shareholders could be substantially lower given the valuation, operational, and significant balance sheet risks embedded in Charter’s stock.”

Marcus added in his statement that although TWC is not for sale, it would accept a bid fop $160 per share, consisting of $100 per share in cash and $60 in Charter stock, with a 20% symmetrical collar, which would protect TWC shareholders from any wild fluctuations in Charter's share price.

“We gave Charter our bottom line, but rather than pursuing this path, Charter has chosen to go public with its third low-ball offer trying to pressure TWC's Board into selling the company at a grossly inadequate price," Marcus continued in the statement.

TWC's board of directors shares the chairman and CEO's sentiments.

“The Board takes very seriously its obligation to maximize shareholder value and, on that basis, we gave Charter our bottom line," said TWC's lead independent director Nicholas J. Nicholas in a statement  "The Charter proposal doesn't come close to providing our shareholders with the kind of value and protections they should expect in a transaction.  In fact, it would transfer significant value from our shareholders to Charter shareholders, while dramatically increasing the risk profile for our shareholders.  As such, it is wholly inconsistent with the interests of our investors and our responsibilities as a Board.”

Whether Charter will come back with a revised deal remains to be seen, but investors appear to believe a higher offer could be forthcoming. Charter stock, down $2.20 each (1.6%) to $134.22 on Monday, gained that deficit back in after-hours trading, where the stock was priced at $136.90, up $2.68 each or 2%. TWC stock also rose in after-hours trading to $134.90 per share, up $2.09 each or 1.5%, signalling that investors believe a higher offer is coming.  

In a statement, Charter said it met with TWC officials in December to try to discuss parameters for a deal, but that the exchange of information was “one-sided.”

“Time Warner Cable's response led Charter to determine there is no genuine intent from Time Warner Cable's management and board of directors to engage in a merger agreement, and that it is prudent to bring the matter to shareholders directly,” Charter said in a statement.

Time Warner Cable did not immediately respond for requests for comment.

Charter argued that since December, TWC stock has appreciated about 40% solely on speculation that a deal with Charter could be completed. For that reason, the MSO said the deal premium was already baked into the stock.

The Stamford, Conn.-based MSO made its initial overtures to TWC in June through one of its largest individual shareholders, Liberty Media. Liberty chairman John Malone has argued that the combined company – which would have about 16 million customers – would operate more efficiently and effectively.

But reports last month said the two companies were at odds on just how large those synergies could be – with Charter estimating $700 million in synergies, including lower programming costs and overhead. TWC’s estimates, according to reports, were in the $500 million range.

Charter has scheduled a conference call for tomorrow at 4:30 p.m. to discuss its position

Charter sent a letter to TWC’s Marcus earlier today, the full text of which is below.

 

January 13, 2014
Time Warner Cable Inc.
60 Columbus Circle
New York, New York 10023
Attention: Robert D. Marcus
Chairman and Chief Executive Officer

Dear Rob:

I enjoyed spending time with you in December discussing our prior proposals and the challenges our industry faces. 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. Our financing plan, which gives us the ability to deleverage during a period where our operating plan has sufficient time to be implemented, is prudent. Our history of operating performance is well understood, as are our tax assets.

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. Following our meeting, you agreed to have our CFOs meet to review the structure, financing, tax and cash flow aspects of a transaction, which we understand was very helpful for Time Warner Cable. We believed Time Warner Cable and its Board of Directors would recognize the significant value of this combination and genuinely engage. Instead, you came back with a verbal offer at an unrealistic price expectation which ignores a full 39% premium already reflected in Time Warner Cable's stock (as of last Friday), widespread shareholder endorsement of a deal, and Time Warner Cable shareholders' approximately 45% ownership in the upside of the proposed transaction. Furthermore, your proposal to significantly increase the cash component of the price contradicts Time Warner Cable's own public statements on debt leverage. The information provided to date has been exclusively one-way, which further reinforces the point that there is no genuine interest from Time Warner Cable management and Board of Directors to engage on this opportunity.

While we are preserving all options going forward, we remain open to real engagement. We would like to engage with you to conclude an agreement for a business combination that is beneficial for your shareholders and ours. We would be prepared to offer a cash/stock election mechanism that would allow those shareholders who wish to participate in the benefits of a combination to do so, while others who wish to cash out will be able to do so at a meaningful premium. The financing to complete this transaction is fully negotiated, and we can be in a position to sign commitment letters in a matter of days.

This transaction is beneficial to Time Warner Cable shareholders who remain invested in the combined company because they realize the value creation from cost reductions, faster organic growth, and leveraged and tax advantaged returns. We also believe that the new combined company, through potential future swaps and divestitures with other industry participants, can help rationalize the geographic holdings of the industry into more efficient entities capable of providing better services and products into a very competitive marketplace, thus generating higher returns for the combined company and the industry at large.

We are fully prepared to finalize a deal on an extremely expedited basis. We believe that time is of the essence to prepare our companies to meet the challenges of the industry, which is why we have decided to announce the status of our discussions to date to both sets of shareholders.

With best regards,
/s/ Tom
Thomas M. Rutledge, President and Chief Executive Officer