Report: Goldman, Charter Working on Time Warner Cable Proposal

TWC Shares Rise 5% on Deal Speculation

Time Warner Cable shares rose as much as 5% before closing up 2.25% at $116.47 each Friday after a Bloomberg News report said Charter Communications was working with investment bank Goldman Sachs to prepare a bid for the second largest cable company in the country.

Speculation has been high concerning a Charter/Time Warner Cable combination since mid-June, when Liberty Media (which owns a 27% interest in Charter) approached TWC informally about a possible combination. TWC rejected the overture at the time.

Liberty Media chairman John Malone has called Charter a “horizontal acquisitions machine,” and sees the mid-sized MSO as a perfect vehicle with which to consolidate the cable industry.

Time Warner Cable has been resistant to a Charter courtship, mainly because the much smaller Charter (it has about one-third the subscribers of Time Warner) would have to leverage any offer using TWC's balance sheet. Some analysts have estimated that a Charter deal would require TWC to raise its leverage from its current 3.25 times cash flow to 5 times, which would cause the MSO to lose its investment grade credit rating.

But by working with Goldman to figure out a deal, Liberty and Charter are at least showing the financial community they are serious about a combination.

According to Bloomberg, Charter and Goldman are working on several different scenarios, although the report was not specific. It also couldn't be determined when a formal offer would be made.

Analysts have been split as to whether a Charter/TWC combination is feasible -- influential Bank of America Merrill Lynch media analyst Jessica Reif Cohen issued a report earlier in the month stating Charter's efforts would be better focused on New York area MSO Cablevision Systems. Others like Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak wrote that a deal could be worked out if both sides can justify the higher leverage.

On Wednesday, credit ratings agency Moody's Investor Service said TWC could make a defensive acquisition to ward off Charter’s advances, with an all-stock deal for Cox Communications being at the top of the ratings agency’s list.

"Like other midsized companies, Cox Communications is likely to face issues of scale in the future, and won't want to be left behind in the race to develop and invest in advanced technology," Moody's senior vice president Neil Begley said in a statement "In that context, a potential tie-up with TWC could not be ignored."

Moody's added that assuming the combined entity continues to repurchase shares and Cox Enterprises is not involved, Cox Enterprises could ultimately be the biggest winner by gaining control of TWC down the road.

A Cablevision acquisition could be a second alternative, but Moody’s said questions surrounding that MSO's ruling Dolan family's willingness to sell could make such a deal difficult to achieve.

Whatever the outcome, the speculation has done wonders for TWC's stock price. Time Warner Cable shares were up about 21% between June 12 and July 18, solely on deal speculation. The stock was up as much as 4.9% ($5.55 each) in early trading Friday to $119.46 per share, before cooling off to $116.47 each (up 2.25% or $2.56 per share) in afternoon trading. Charter shares closed at $128.31 each, up 3% or $3.74 per share.