Liberty Tosses Cold Water on Altice-Charter Pairing

Maffei says taking ‘equity we don’t want’ unlikely

Liberty Media CEO Greg Maffei dampened the enthusiasm around reports that European telecom company Altice N.V. was contemplating making a play for one of Liberty’s biggest holdings, Charter Communications, telling analysts that it was unlikely that the company would accept equity it doesn’t want in any proposed deal.

Liberty owns about 25% of Charter stock, which it acquired through a series of deals back in 2013. The company set up a separate tracking stock – Liberty Broadband – that includes the Charter equity, about a year after that.

On Wednesday, CNBC reported that Altice was lining up banks to make a possible Charter bid, which sent the cable company’s stock skyward in early trading. Charter shares closed at $400.90, up 3%. On Thursday, both stocks were down slightly in early trading -- Charter to $400 per share (down 90 cents each or 0.2%) and Altice USA to $30.94 per share (down 15 cents each or 0.5%).

Altice and Charter both declined to comment on the CNBC report.

Charter has been the subject of intense takeover speculation for months from Sprint and Verizon Communications. Altice, which spun off its U.S. cable operations as a separate publicly traded company called Altice USA in June, is just the latest in what is becoming a long line of possible Charter suitors.

But a Charter deal would be expensive. Some analysts have speculated that any takeover would require an offer in excess of $500 per share, which when coupled with Charter's $67 billion in debt, would value the company at more than $200 billion. In contrast, Altice N.V. has a market capitalization of about $90 billon and Altice USA’s is about $23 billion.

Equity would be a key part of any deal, mainly because of tax reasons. Liberty bought its Charter stake at $95.50 per share in 2013; the stock is worth four times that now.

In a research note, FBN Securities media analyst Robert Routh wrote that Liberty’s tax basis in its Charter stake is “materially lower” than Charter’s current price "implying that for Liberty to even consider any deal, they would need to receive only equity consideration," just like it did when Charter purchased Time Warner Cable.

Routh noted that in the TWC deal, shareholders had the option of taking $100 or $115 in cash, with the balance of the deal in New Charter equity. But Liberty received only New Charter equity for all of its TWC holdings. That makes Maffei’s comments on the call all the more relevant.

“The idea that we would take equity that we don’t want is probably unlikely,” Maffei said on the conference call. “A lot of it is going be based on levering up Charter and if we want to lever up Charter, we have that opportunity. Any deals that would be appealing for us and other Charter shareholders would have to add real value and show real capabilities that are beyond what we think is a very well positioned company and a very strong management team. We are below our own leverage targets, we are below the leverage target that most other people at least have been rumored to talk about. There are a lot of things that we could execute on if we thought it had short term appeal.”

Maffei pointed out that Charter had a strong second quarter – revenue and cash flow were up 3.9% and 8.6%, respectively, and the company appears to be turning the corner on subscriber losses exacerbated by heavy promotional discounting at Time Warner prior to the deal’s close.

“They had a solid quarter that set up well, we believe, for future growth, not only on the bottom line but also on the top line,” Maffei said. “Rolling out our new pricing plans, absorbing the relatively unattractive modem pricing scheme that Time Warner had, taking the short term hit on that, setting people in place to move them to better video packages over time. A lot of groundwork is being laid that we think sets up very well for Charter’s future growth. We remain very committed and excited to the Charter stock. We will listen to all and any offers that a come in, and judge them on their merit and appeal.”