Charter Communications Inc. (CHTR:US), the fourth-largest U.S. cable operator, amended a credit agreement that would give the company more flexibility for acquisitions.
The modified pact, which affects about $4.8 billion of loans, changes a covenant to allow the company to assume more debt for deals, according to a filing today. Stamford, Connecticut-based Charter is the most indebted junk-rated U.S. cable company, with $12.8 billion of borrowings, according to data compiled by Bloomberg.
Charter is exploring alternatives to acquire the second-largest U.S. cable company, Time Warner Cable Inc. (TWC:US), according to people familiar with the matter. Liberty Media Corp. (LMCA:US), which owns 27 percent of Charter, may also provide funding, or the companies may structure a deal by borrowing against Time Warner Cable’s assets, the people said.
“It is unclear whether Liberty/Charter has the financial capacity to do the deal,” Jaison Blair, an analyst at Telsey Advisory Group in New York, said in a note to clients. “The owners of the $26 billion of high-grade Time Warner Cable bonds are likely to be reticent to allow Liberty/Charter to use TWC’s balance sheet to buy the company.”
Time Warner Cable, based in New York, has a market valuation of $31.9 billion and an enterprise value -- which includes debt -- of about $55 billion. Charter’s market valuation is $12.7 billion and Liberty’s is $15.7 billion. The probability that Charter and Englewood, Colorado-based Liberty can pull off an acquisition is about 50 percent, Blair said.
Time Warner Cable would probably lose its investment-grade credit rating if a Charter acquisition occurred, Moody’s Investors Service said today. The cable provider is rated Baa2, or two levels above junk, by Moody’s. Charter has a Ba3 rating, or three levels below investment grade.
“Given that Time Warner Cable is a public company without a controlling shareholder, its defenses against activist shareholder pressure or an outright takeover are limited,” Neil Begley, a credit analyst at Moody’s in New York, said in a note to clients. “A poison pill would not thwart a reasonable offer to buy the company and would have to be considered by the board of directors, and in the absence of protective indentures bondholders are typically an afterthought in such situations.”
Charter’s loans in its credit agreement -- initially signed in March 1999 and amended and restated multiple times since then -- consist of $3.45 billion of term debt and a $1.3 billion revolving credit facility.
Charter is also examining acquiring Bethpage, New York-based Cablevision Systems Corp. (CVC:US), the fifth-largest U.S. cable provider, according to people familiar with the matter. Time Warner Cable may also attempt to buy “mid-sized” targets to ward off a Charter deal, Moody’s said.
Charter rose 2.4 percent to $125.14 at the close in New York. Time Warner Cable fell 1.3 percent to $109.47. Cablevision rose 3.1 percent to $19.02.
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