Shares of Time Warner Cable and Cablevision Systems soared Thursday after reports that Liberty Media chairman John Malone was “exploring scenarios” to construct a deal to purchase one or both companies through his latest cable holding, Charter Communications.
According to a report in Bloomberg News, Malone is looking for ways to facilitate a Charter purchase of TWC, either through borrowing against both assets to include more cash in a deal, or constructing a three-way purchase that would involve another MSO, perhaps Bethpage, N.Y.-based Cablevision Systems.
Officials at Time Warner Cable, Charter and Cablevision all declined comment.
TWC shares were up as much as 8.5% ($8.80 each) on Thursday to $112.44 per share, before settling down somewhat to close at $108.23, up 4.4%, or $4.59 each. Cablevision shares rose as much as 10.3% ($1.59 each) to $17.01 each before settling to close at $16.28 each, up 86 cents (5.6%).
Charter shares also rose sharply during the day, up as much as 8% ($9.57 each) to $128.57 before closing at $123.81, (up $4.81 each, or 4%).
Buying Time Warner Cable won’t be cheap. The 12-million subscriber MSO has a market cap of about $32 billion, more than twice Charter’s $12.5 billion market cap. And TWC has said in the past that it considers its leverage ratio (at about 3.25 times cash flow) to be sacred, meaning it would be loath to take on the large amount of debt that would be necessary to do a deal.
According to the Bloomberg article, Charter would have to pay at least $37 billion to snag TWC, a level that may be too big even for Malone to swallow.
Malone’s Liberty Media owns a 27% stake in Charter and has made no secret of its intention to use the company as an acquisitions vehicle. Earlier this month, Liberty CEO Greg Maffei had discussed general consolidation issues with TWC chairman and CEO Glenn Britt, which fueled speculation that a deal could be in the works. While later reports said TWC was not interested in a merger with Charter, the stock continued to soar on the speculation.
One source in the cable investment community said that Charter CEO Tom Rutledge was in Boston recently talking to TWC and Charter institutional investors to try to drum up support for a deal. That same executive said Charter had floated paying TWC 100% of its stock price in cash, and offering a 30% premium in Charter shares, which was rebuffed.
“If it happened this would be the deal of the decade,” the executive said. “But the chances of it happening are low. This is a long shot.”
But investors are putting pressure on TWC to do something – shares are up 10% in the past two weeks, almost entirely on deal speculation. And some analysts are wondering if there comes a point where the second largest cable operator in the nation could be forced into doing a deal.
“The market is putting a lot of pressure on TWC to do a deal with Charter driving both names materially higher,” said Pivotal Research Group principal and senor media & communications analyst Jeff Wlodarczak, adding that although he believes Liberty is pushing for a deal, he does not think Liberty could or would go the route of a hostile takeover attempt.
“The bottom line is I definitely think Liberty is pushing this and that more consolidation is needed,” Wlodarczak said. “Can shareholders put enough pressure on TWC to push them into a deal?”