Bucking the recent trend of cable companies buying their way out of the public markets, Time Warner Cable filed for an initial public offering last week.
The sale of stock to general investors is valued at about $5.5 billion and could finally close the books on its $17.4 billion joint purchase of Adelphia Communications. That value could get even bigger, as Time Warner Cable moves closer to an IPO.
A Time Warner Cable offering could ultimately fetch anywhere from $35 to $40 per share. “This is going to be so over-subscribed it’s ridiculous,” Jefferies & Co. cable analyst Robert Routh said.
But Time Warner may not go through with a formal IPO in order to create a stock that contains its cable operations. The media giant’s preferred method of issuing a public stock would be to fold the cable unit into the legal shell of the corporation that operated as Adelphia (“Court Quiet on Adelphia Sale,” Multichannel News, April 18, 2005). Using the shell would avoid the costs and the time associated with a formal IPO.
Moving the cable operations into the shell could save Time Warner a hefty amount. In its fifth plan of reorganization filed on Oct. 16, Adelphia estimated that an IPO could cost Time Warner Cable more than $600 million.
But to avoid an IPO, the shell must be available. Adelphia first must complete its Chapter 11 bankruptcy, an effort that is being held up by a pair of Adelphia creditors that have so far rejected four of that company’s reorganization plans. A Nov. 27 hearing has been scheduled in U.S. Bankruptcy Court for the Southern District of New York regarding the latest reorganization plan.
The announcement of the Time Warner Cable IPO has been long expected. When it announced the joint purchase of Adelphia with Comcast in April 2005, Time Warner said part of the purchase price would come in the form of a newly issued cable stock.
News of the pending IPO came less than two weeks after Cablevision Systems said its ruling Dolan family has proposed taking that cable company private in a deal valued at about $19.2 billion in cash and assumed debt. Last year, Insight Communications Co. went private in a $710 million deal. In 2004, Cox Communications went private in a transaction valued at about $8.5 billion.
While Adelphia’s bankruptcy court hearing is more than a month away, the Time Warner Cable IPO is not expected to be initiated until the end of the year at the earliest, if at all.
That would give Time Warner Cable ample time to pull its IPO filing and instead fold the cable unit into the Adelphia shell.
The process by which Time Warner Cable could do that is called a reverse merger, in which the Adelphia shell corporation would essentially absorb the Time Warner cable unit. Time Warner Cable would be the surviving entity and would instantly become publicly traded. The process is fairly common — Texas Instruments, Berkshire Hathaway, Tandy/RadioShack, Occidental Petroleum and Blockbuster Entertainment all went public via reverse merger.
In the case that Adelphia can’t reach agreement with its creditors — which is not out of the question — Time Warner has the IPO to fall back on.
Either way, Time Warner Cable will have a publicly traded currency and the time appears ripe for a fresh cable stock.
While cable stocks have been pummeled in the past few years, this year the sector has risen nearly 28%, fueled mainly by strong financial performance and the better than expected consumer acceptance of voice-over-Internet Protocol cable telephony.
Time Warner has been one of the leaders on both fronts: The cable unit has 1.4 million VoIP subscribers — tops in the industry — and has consistently delivered double-digit revenue and cash-flow growth.
Time Warner Cable will retain its current top management — CEO Glenn Britt, chief operating officer Landel Hobbs, chief technology officer Mike LaJoie, executive vice president and general counsel Marc Lawrence-Apfelbaum and executive vice president of corporate development Carl Rosetti.
In the prospectus for the stock, Time Warner Cable revealed the pay of its top executives for the first time. Britt made $5.3 million in salary and bonuses in 2005, followed by $2.01 million for Hobbs, $851,275 for LaJoie; $1 million for Lawrence-Apfelbaum and $928,400 for Rosetti.
Time Warner Cable has also been one of the drivers of parent Time Warner Inc.’s financial results — it contributed about 22% of 2005 total revenue and 47% of the operating income before depreciation and amortization (a measure of cash flow) for the entire company. While the cable unit’s results will still be consolidated on Time Warner Inc.’s balance sheet — Time Warner Inc will have an 84% equity interest in the cable stock and 90.6% of its vote — spinning off the cable unit is a way to unlock its inherent value.
“They have to highlight the value of the cable business because the cable business is a cash cow for that company,” said analyst Routh.
Routh added that there maybe a growing feeling inside the company that while its cable networks are expected to grow steadily, they may not be able to sustain the level of growth they have experienced in the past. And its Warner Bros. film studio is largely a hit-driven business.
“First, [the IPO] is going to take Adelphia out; and second, it’s going to set a valuation parameter for the second largest domestic cable operator that has done incredibly well,” Routh said.
Time Warner Cable did not disclose how many shares it will issue or at what price. The $100 million value of the offering on the prospectus is mainly to determine the registration fees for the offering. However, the company did offer a hint as to what it considers its worth to be.
According to the preliminary prospectus, filed Oct. 18 with the Securities and Exchange Commission, Adelphia would receive about 16% of Time Warner Cable stock, or about 156 million shares. The $5.5 billion value Time Warner Cable placed on those shares translates into a $35.25 per share valuation.
Based on that price and its plan to have about 976 million outstanding shares, Time Warner Cable is valuing the entire company at about $34.3 billion.
Time Warner will not sell any of the shares in the IPO, nor will it receive any proceeds from the deal. As part of its July 31 purchase agreement with Adelphia, Adelphia has agreed to sell 33.3% of its Time Warner Cable stock in the IPO, or about 52 million shares, which will ensure that the stock has a public float.
That $35.25 per share value would put Time Warner Cable, the second-largest U.S. cable operator, in the same league as Comcast, which is trading in the $36-per-share range.
ACT II Partners analyst Dennis Leibowitz added that the stock could end up trading even higher.
“If you look at Comcast’s multiples, that’s your proxy of where it could go,” Leibowitz said. “Most people think that Comcast could go to as much as $45 per share, which is an 8.5 to 9 times multiple to 2007 [cash flow].”
Routh said that determining the multiples for the $35.25 value is difficult, because Time Warner hasn’t revealed pro forma financials including the Adelphia deal. Those should come in later filings.
|<p>SNAPSHOT: Time Warner Cable</p>||<p>The Stock</p>|
Price Per Share*
Pro Forma Debt
Pro Forma Shareholders Equity
Glenn Britt, Time Warner Cable CEO
Carole Black, former CEO, Lifetime Entertainment Services
Thomas Castro, co-founder Border Media Partners, radio broadcasting group
David Chang, chancellor, Polytechnic University in New York
James Copeland, global scholar, Robinson School of Business, Georgia State University; former CEO, Deloitte & Touche
Peter Haje, legal and business consultant; retired executive VP and general counsel, Time Warner Inc.
Don Logan, chairman of the board; former chairman, Time Warner Media & Communications Group
Michael Lynne, co-chairman and co-CEO of New Line Cinema, a Time Warner Inc. subsidiary
N.J. Nicholas, investor; former president of Time Inc.; former co-CEO of Time Warner Inc.
Wayne Pace, chief financial officer, Time Warner Inc
SOURCE: Time Warner Cable prospectus