Charter Said to Prepare Offer for Time Warner Cable
(Corrects location of analyst in third paragraph of story dated Dec. 13.)
Charter Communications Inc. (CHTR) is preparing an offer letter to acquire Time Warner Cable Inc. for less than $135 a share, according to a person with knowledge of the matter.
Charter will offer cash and stock, in a so-called bear-hug letter to Time Warner Cable as early as next week, according to the person, who asked not to be identified because the negotiations are private.
Charter, the fourth-largest U.S. cable company, could generate as much as $1 billion in annual cost savings with better deals on programming and by cutting overhead, said Matthew Harrigan, an analyst with Wunderlich Securities Inc. in Denver. Still, it would be risky for the company to bid too high for Time Warner Cable, which is losing video subscribers to competitors including AT&T Inc. (T)’s U-verse and Verizon Communications Inc. (VZ)’s FiOS.
“Time Warner Cable continues to lose subscribers and customer service issues continue to be deteriorating,” Harrigan said in a telephone interview. “It’s not going to be easy to fix.”
Time Warner rose less than 1 percent to $131.41 at the close in New York. The shares have gained 35 percent this year on speculation that a takeover bid is coming. Charter fell less than 1 percent to $131.54.
Time Warner Cable lost more video subscribers than any other major cable company in the most recent quarter, dropping 304,000 customers in the period, according to data compiled by Bloomberg. While a dispute with CBS added to the losses, that compares with a loss of 27,000 video subscribers at Charter and 129,000 fewer video customers at Comcast Corp. (CMCSA) in the same period.
Time Warner Cable is still expanding its residential Internet and phone businesses, and business services revenue is set to double over the next four or five years, according to the company’s forecast. The New York-based company would probably accept a bid of $150 to $160 a share, a person familiar with the matter said earlier this month.
A bid of $135 a share would value Time Warner Cable at about $62 billion, including the value of its debt. That’s about 7.5 times estimates for its 2014 earnings before interest, taxes, depreciation and amortization of $8.24 billion, data compiled by Bloomberg show. Charter currently trades at a multiple of 8.7 times estimated 2014 Ebitda, while Comcast fetches 7.5 times, the data show.
Charter acquired Optimum West, a division of Cablevision Systems Corp., for $1.63 billion earlier this year, a multiple of about 8 times 2013 Ebitda, the data show. A bid of 8 times 2014 Ebitda would value Time Warner Cable (TWC) at $149 a share.
Harrigan estimates Charter can offer $96 per share in cash with the rest coming in Charter stock. Charter is raising about $25 billion in financing for its bid, according to people familiar with the situation. John Malone, Charter’s largest shareholder with a 27 percent stake through his holding company Liberty Media Corp., has publicly advocated for cable consolidation.
“Liberty and Charter have an advantage here in that their offer will have a heavy cash component,” he said.
Comcast and Cox Communications Inc. are not part of Charter’s offer, two people familiar with the terms said. Comcast, which had discussed a joint bid that would have it split up the assets with Charter, is monitoring Charter’s moves, they said.
Spokesmen for Charter, Comcast, Cox and Time Warner Cable declined to comment.
Comcast is waiting to see how Time Warner Cable reacts to Charter’s bid, one of the people said. Time Warner Cable could agree to a deal with Charter including a low breakup fee and the option to solicit other offers, allowing it to negotiate with other suitors, the person said.
That would give it a floor to any rival bid. Another option is to negotiate closely with Charter without signing up a deal in hopes other cable operators, including Comcast, make a rival bid, the person said.
Comcast could be interested in owning the cable assets of New York, Los Angeles, or both, according to Craig Moffett, an analyst at MoffettNathanson LLC. Comcast owns assets in California, as well as in the Eastern U.S.
“I wouldn’t be surprised if Comcast comes in to do a systems swap with Charter,” Harrigan said, referring to the possibility that the two cable companies could exchange geographic areas so that both could end up with contiguously placed markets that would be easier to service.
To contact the reporter on this story: Alex Sherman in New York at email@example.com