Time Warner Cable Inc. (TWC:US) rejected an acquisition offer from Charter Communications Inc. (CHTR:US) valued at more than $61 billion including debt, spurning the biggest unsolicited takeover bid since 2008.
Time Warner Cable Chief Executive Officer Rob Marcus called the $132.50-a-share bid a “low-ball offer” in an interview yesterday. The proposal included about $83 cash per share and about $49.50 in stock, according to Charter. Excluding debt, the deal would be worth about $37.3 billion.
Charter, backed by billionaire John Malone, is seeking to create a provider of TV, Internet and phone service for about 20 million subscribers in 38 states. The combined company would be the third-largest pay-TV operator by customers -- behind Comcast Corp. (CMCSA:US) and DirecTV -- helping it generate cost savings and negotiate better programming deals.
“We haven’t received a serious response,” Tom Rutledge, Charter’s CEO, said in a separate interview yesterday. “Our objective was to talk to management and try to get them engaged. They have not, so we’re going to make our case to shareholders about why this deal is good for them and hope they ask management and the board to watch out for the interests of shareholders.”
Charter sent a letter to Marcus yesterday explaining why the company’s offer is beneficial for shareholders. Rutledge said he last proposed an acquisition in late December.
Time Warner Cable’s board rejected Charter’s offer, calling it “grossly inadequate,” according to a statement yesterday. Marcus said the company is open to a deal with Charter for $160 a share, or $100 in cash and $60 in Charter common stock.
“Here’s what happened: We didn’t put our house up for sale, and we got a knock on the door and someone made a low-ball offer,” Marcus said in the interview. “They want a premium asset at a bargain-basement price, and that’s just not going to happen.”
Time Warner Cable probably won’t accept an offer less than around $150 per share, Christopher King, a Baltimore-based analyst with Stifel Nicolaus & Co., wrote in a note to clients.
Time Warner Cable’s shares rose 2.7 percent to $136 at the close in New York, giving it a market value of more than $38 billion. The stock has climbed (TWC:US) about 40 percent since the beginning of June on renewed speculation of cable mergers.
“The market believes this is going to lead to a deal,” Craig Moffett, an analyst at MoffettNathanson LLC, said in an interview. “But it’s not a foregone conclusion that this ever reaches a successful consummation.”
Rutledge and Charter Chief Financial Officer Chris Winfrey met with Marcus and Time Warner Cable CFO Artie Minson in December to walk through details of the offer, including structure, financing, tax and cash-flow implications, according to the letter. Charter indicated its willingness then to submit a proposal at the low $130-a-share level, including a cash component of $83 a share.
When Time Warner Cable responded to that with a request for a higher bid including a higher cash component, Charter determined its bigger peer wasn’t interested in pursuing a merger agreement, according to the letter.
That response was “not a serious offer,” said Rutledge. “They knew the price they were offering was designed to not appeal.” Time Warner Cable also refused to share any due diligence details or its projections of future cash flows, Rutledge said.
Charter is preserving “all options going forward,” according to the letter. That may include nominating a slate of directors to Time Warner Cable’s board or a tender offer, a person with knowledge of the matter said. Still, Rutledge would prefer to complete a friendly cash-and-stock deal as soon as possible, he said. Charter has “fully negotiated” financing and can be “in a position to sign commitment letters in a matter of days,” the letter shows.
“I don’t know how they think that any board that would result from a proxy fight -- if that’s what they have in mind -- would come to any different conclusion than what we did,” Marcus said.
Time Warner Cable shareholders (TWC:US) would own about 45 percent of the new company in the proposed deal, Rutledge said. The combined company would have more leverage in future negotiations with content providers, who have been raising annual prices at about 10 percent per year. An acquisition would also allow Charter, the fourth-largest cable operator, to use its net operating losses as a future tax shield.
Moreover, Charter would improve Time Warner Cable’s customer service and restart video growth, Rutledge said.
“Since we made our first proposal, Time Warner Cable has lost another half-million video customers,” Rutledge said. “Their customer service continues to decline in every measure. We can improve it. We have a demonstrated track record of improving customer service. It’s a question of credibility.”
Time Warner Cable lost 215,000 video subscribers in the fourth quarter after a 304,000 loss in the previous three months. The company has the lowest customer-satisfaction score among all pay-TV operators and the second-lowest score among all companies ranked in the American Customer Satisfaction Index for 2013, behind only the Long Island Power Authority.
The cable company resisted Charter’s approaches to reach a friendly deal on several occasions over the past few months: in June, October and -- most recently -- December, Rutledge said. He said he last spoke with Marcus at the International Consumer Electronics Show this month in Las Vegas.
Charter’s previous offers of cash and stock valued Time Warner Cable at $114 a share in June and about $127 in October, according to Time Warner Cable’s statement.
“Our board unanimously rejected all of them,” Marcus said. “They were all low-ball bids.”
Bloomberg first reported Charter’s intent to make an offer for Time Warner Cable last month. A successful takeover would be the largest of a cable company since Comcast Corp. acquired AT&T Broadband in 2001 for about $72 billion.
Malone, whose Liberty Media Corp. (LMCA:US) is Charter’s largest shareholder, told investors last month he expects Time Warner Cable to reject Charter’s opening bid, according to people familiar with the matter. The billionaire has had internal discussions with Rutledge about a list of directors to name to Time Warner Cable’s board before the window for nominations closes on Feb. 15, another person said.
Courtnee Ulrich, a spokeswoman for Liberty Media, said the company supports Charter’s efforts and looks forward to participating.
“We have been encouraged by Time Warner Cable shareholders to pursue this opportunity,” she said.
Liberty, the majority owner of Sirius XM Holdings Inc. (SIRI:US), announced an all-stock offer for the outstanding shares of the satellite-radio company last week. That deal may help fund an offer for Time Warner Cable by giving Liberty more cash flow and additional assets to borrow against, CEO Greg Maffei said in an interview.
Charter’s offer is for all of Time Warner Cable, which has about 12 million video customers and cable assets in cities such as New York, Los Angeles and Dallas.
Comcast, the largest U.S. cable operator, also is considering a bid, either on its own or with Charter, people with knowledge of the matter have said. It may be interested in acquiring the New York market, some Midwestern cable regions and Time Warner Cable’s regional sports networks, which broadcast L.A. Dodgers and L.A. Lakers games, said Shahid Khan, co-founder and chairman of Mediamorph Inc.
Order of Deals
A Charter deal for Time Warner Cable could be completed first, before Comcast obtains divested assets, according to Moffett. Rutledge and Marcus declined to say if they were having active negotiations with Comcast or Cox.
Since 2009, there have been just two larger takeover offers, and both were accepted. Only Pfizer Inc.’s $64.2 billion deal for Wyeth LLC in 2009 and Verizon Communications Inc. (VZ:US)’s $130 billion acquisition of Vodafone Group Plc’s Verizon Wireless stake last year top the value of Charter’s offer.
The $61.3 billion offer is also the largest unsolicited takeover attempt since BHP Billiton Ltd’s $115 billion bid for Rio Tinto Plc in 2008, according to data compiled by Bloomberg.
Goldman Sachs Group Inc. and LionTree Advisors LLC are serving as lead financial advisers to Charter. Guggenheim Securities LLC is also advising Charter.
Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs would provide the financing for a transaction, according to yesterday’s statement. Charter’s legal advisers are Wachtell Lipton Rosen & Katz and Kirkland & Ellis LLP.
Time Warner Cable’s financial advisers include Morgan Stanley, Allen & Co. and Citigroup Inc., according to its statement. Paul Weiss Rifkind Wharton & Garrison LLP is the company’s legal adviser.
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