After repeated overtures and at least two undisclosed bids, Charter Communications has made an public offer to acquire Time Warner Cable (NYSE:TWC) in a deal that would be worth more than $61 billion, including cash and stock equity of $37.4 billion and the remainder in debt. Noting the much-rumored deal had driven TWC stock up, Charter offered just $132.50 per share (about where the shares have been trading), to be financed with $83 per share in cash and the remainder in Charter stock. In the absence of an acquisition premium, Time Warner Cable called the offer “grossly inadequate”. The deal would represent an EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of approximately 7x, well below past transactions in the cable sector.  .
Time Warner Cable is the second largest cable operator in the U.S. with more than 11 million pay-TV customers.  The company made clear that the board is open to a transaction with Charter at a price of $160, consisting of $100 in cash and $60 per share of Charter common stock. This represents 8x EBITDA, which is more in line with comparable transactions. ((Time Warner Cable Board of Directors Unanimously Reject Third Grossly Inadequate Proposal from Charter Communications, Time Warner Cable’s Press Release, Jan 13, 2014)) It will be interesting to see how events unfold going forward and what other options does Charter explore.
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- What’s Time Warner Cable’s Fundamental Value Based On Expected 2016 Results?
Pay-TV Subs Decline Further
The pay-TV business contributes around 45% to Time Warner’s value, according to our estimates. Time Warner Cable has been losing pay-TV subscribers for quite some time now. In the fourth quarter of 2013, it lost 215,000 pay-TV subscribers amid competition with telcos and the challenge of convincing younger consumers to pay for TV.  This brings Time Warner Cable’s customer losses for the year to about 825,000, up from 530,000 in 2012. Apart from the fierce competition from telcos, the rise of alternate video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) is hurting the cable company. The company’s disputes with channel partners such as CBS have also added to the woes (Read More - CBS Dispute Weighs Heavy On Time Warner Cable Results, Broadband And Pay-TV Subs Decline).
Synergies Between Time Warner Cable And Charter Communication
Time Warner Cable has more than 11 million pay-TV subscribers while Charter Communications has over 4 million.   Together they would be the second largest cable operator after the giant Comcast (NASDAQ:CMCSA). In terms of broadband, which is experiencing fast growth in the U.S., both Time Warner Cable and Charter Communications need to develop their systems in order to compete with the new technologies such as Fios and Google Fiber. A consolidation can help these companies to gather the necessary capital. Another benefit is in terms of reduced programming costs that a merger could bring in. Additionally, there would be tax efficiency as Charter Communications accumulated tax that can act as tax shield for the new entity.
While all of that sounds good, there is a bitter part to the story. Charter Communications has some history of its own. In 2007, the company was ranked the worst cable Internet service provider in the U.S. Later in 2008 and 2009, the company’s triple play bundle was rated the worst among all national carriers. Moreover, in terms of customer satisfaction, the company is rated the poorest in the U.S.  However, Charter Communication has been improving for some time now.
Time Warner Cable on the other hand has managed to perform well on its own. It has been facing the issue of customer churn in the past few quarters, but that is applicable to the entire cable industry. In a time when cable giants are aggressively addressing the issue of customer churn, and we estimate it to be lower for Comcast going forward, it will be difficult for other companies to compete in the industry on their own. A consolidation on the other hand can offer multiple benefits. The rumors about a marriage between Time Warner Cable and Charter Communications may or may not take place, but it is clear that a consolidation in the industry is feasible and can help the companies compete better against alternatives, including DirecTV, web-based programming and telcos such as Verizon.
Time Warner Cable’s stock has climbed about 40% since June last year. Despite bleeding pay-TV subscribers, the markets gave a thumbs up to the company’s stock. Liberty Media, which owns 27% of Charter, has been vocal about its goal of leading the consolidation in the cable industry and market was anticipating a bid for the cable company. Comcast separately has been investigating the possibility of acquiring all or part of Time Warner Cable. Notes:
- Time Warner Cable Board of Directors Unanimously Reject Third Grossly Inadequate Proposal from Charter Communications, Time Warner Cable’s Press Release, Jan 13, 2014 [↩]
- Time Warner Cable’s SEC Filings [↩] [↩]
- Time Warner Cable Loses 215,000 TV Customers in Fourth Quarter, Bloomberg, Jan 8, 2014 [↩]
- Charter Communications SEC Filings [↩]
- Charter Cable Rated as Worst Again by Consumer Reports, WSAW, Jan 8, 2013 [↩]
- Exclusive: Comcast weighs three options for Time Warner Cable deal: sources, Reuters, Dec 16, 2013 [↩]