M&A Watch: TWC and Charter


BTR_Feature_Art_TWC_1-20-13 After more than six months of dealings and at least two prior offers, Charter Communications (NASDAQ:CHTR) went public with a third attempt to buy Time Warner Cable (NYSE:TWC), hoping that shareholders would put pressure on the nation's second-largest cable operator to sell. Charter issued a statement last week and an open letter to Robert Marcus, TWC's chairman and CEO, suggesting a willingness to pay approximately $132.50 per share, including $83 in cash and $49.50 in Charter stock.

TWC's board of directors almost immediately rejected the proposal as "grossly inadequate" and a "non-starter" that "substantially undervalues" the company. In a statement, Marcus wrote that in a December meeting with Charter, TWC said it would be open to a transaction at a price of $160 per share, including $100 cash and $60 per share of Charter common stock, with a symmetrical collar.

What does this all mean, and what is the next step?

Charter's stated goal by breaking out of closed-door meetings and going public is to allow the shareholders to decide. Charter began meeting directly with TWC shareholders last week, according to news reports, which also indicated that several large investors, including two of TWC's top investors, would not support the current offer, but would back a sale at $145 to $150 per share. Although it was not made clear exactly who made these statements, it is known that among TWC's largest shareholders are Dodge & Cox Inc., Capital Group Cos. and T Rowe Price Group Inc.

Rutledge has said there could be a proxy contest where TWC shareholders would choose new board members with the intent of selling. However, TWC CFO Arthur Minson told MSN he didn't think this would occur. "New board members ... would have to breach fiduciary duty by trying to sell the company to Charter cheaply," he said.

Charter also approached Comcast (NASDAQ:CMCSA) once again last week, trying to bring it into the mix, news reports said. The idea would be to split up TWC's assets between the two, once Charter completes an acquisition. The two companies reportedly also discussed the matter last fall. It has been suggested that Comcast feels any antitrust issues over its picking up TWC's urban areas would be as steep as if it took over the company itself, according to DealBook.

As for the value of the deal, Rutledge has noted that its $132.50 amounts to a 40% premium over what TWC's stock was worth in June, when the acquisition talks started. But Marcus countered by pointing out the offer is only 7X TWC's projected forward EBITDA (earnings before interest, tax, depreciation and amortization), which reportedly is $8.3 million for the year. He noted that this is "well below past transactions the cable sector."

The deals he alluded to might be Charter's purchase of Bresnan Communications at 8X EBITDA, TWC's acquisition of Insight Communications for 8.4X that company's EBITDA, and Liberty Media's (NASDAQ:LBTYA) taking a 17% share of Charter for 8.6X EBITDA, according to reports.

The $160 per share that TWC has proposed is 8 times its EBITDA. "We gave Charter our bottom line, but rather than pursuing this path, Charter has chosen to go public with its third low-ball offer," Marcus said.

Charter's take on those numbers is somewhat different, with the company saying its tax adjusted forward EBITDA multiple shows its offer as 7.3x TWC's future EBITDA. It lists Liberty's acquisition of 17% of Charter also at 7.3x, TWC's purchase of Insight at 6.5x, and Charter's purchase of Bresnan at 6.8x. Charter says its next step will be determined by the level of support it receives from TWC shareholders.

TWC's counterproposal includes a greater percentage of cash to stock, but also requests that the deal be subject to a symmetrical 20% collar. What this means is that if after the deal is struck, Charter stock goes up, it would issue fewer shares. But if it goes down, more shares would go to TWC, according to DealBook, a NY Times publication.

Monta Monaco Hernon is a free-lance writer. She can be reached at mcmhern@yahoo.com.

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