Nearly two months after Comcast trumped its bid for Time Warner Cable Inc. (TWC:US), Charter is still debating whether to compete for the New York-based cable provider. At issue is Comcast’s plan as part of the takeover to divest 3 million subscribers, which Charter is eager to acquire, according to people with knowledge of the matter.
If Charter starts a bidding war for all of Time Warner Cable that pushes up the price -- and loses -- it might end up with nothing. Comcast could look elsewhere to divest or sell the subscribers, the people said, asking not to be identified discussing private deliberations. On the other hand, a drop in Comcast shares since the all-stock deal was announced is creating an opening for Charter to counter-bid.
“It’s a real game theory situation that’s tough to address,” said Matthew Harrigan, an analyst at Wunderlich Securities in Denver. “Comcast probably doesn’t want to go higher on the price for Time Warner Cable. You have to be careful about cable valuations in this environment. But that affects Charter too. So I think Charter’s in a bit of a box.”
Charter’s options include threatening to raise its bid for Time Warner Cable as leverage to reach a deal for the divested subscribers. Still, the company is wary of further angering Comcast’s management, whose cooperation it will need in any attempt to acquire the subscribers, according to two people familiar with the matter.
“Charter is probably still getting under Comcast’s skin by continuing their proxy effort,” Harrigan said.
Charter urged Time Warner Cable investors to vote down a takeover by Comcast last month. The Stamford, Connecticut-based company hasn’t rescinded the slate of independent candidates it nominated to replace Time Warner Cable’s board in February.
Comcast expects about $18 billion for the subscribers, a person with knowledge of the matter said. While it hasn’t announced the specific markets it will sell, the Philadelphia-based company has interest from other cable providers and is also considering spinning off the subscribers into a new company, which could be run by current Time Warner Cable executives, two people said.
Acquiring some Time Warner Cable subscribers, rather than none, would be a consolation prize for Charter. John Malone, who controls Charter’s largest investor Liberty Media, has said he wants the cable company to be a “horizontal acquisition machine,” buying up many cable assets to increase the scale of the operator.
John Demming, a spokesman for Comcast, declined to comment, as did Justin Venech, a spokesman for Charter.
The two companies have had a strained relationship since Comcast surprised Charter by reaching a deal to acquire Time Warner Cable for $45.2 billion in February, the people said. Charter had made its own offer to buy the company for $37 billion in cash and stock and had held talks with Comcast about dividing Time Warner Cable up as part of that bid.
Comcast’s management don’t trust some of the top executives at Liberty Media and Charter and disapproved of the way they approached Time Warner Cable, according to two people. When it made its unsolicited offer for Time Warner Cable, Charter lambasted the target for its poor performance in recent years -- harsh language that Comcast Chief Executive Officer Brian Roberts found distasteful, the people said.
Charter’s opportunity comes after Comcast shares have fallen about 6.7 percent in almost two months -- lowering the deal’s value to about $39.4 billion. Regulatory delays and integration concerns have caused both Comcast and Time Warner Cable to drop, Vijay Jayant, an analyst at ISI Group in New York, said.
Comcast fell 0.8 percent to $49.41 at 11:20 a.m. in New York. Charter dropped 1 percent to $122.76, while Time Warner Cable slid 0.5 percent to $137.64.
Additionally, investors view Comcast as “dead money” until the transaction closes, said Craig Moffett, co-founder of MoffettNathanson LLC in New York, especially because there are legitimate concerns about the deal.
“The market reaction reflects three concerns: how easy it will be to fix Time Warner Cable, how easy it will be to achieve the stated synergies, and what will be the costs of regulatory conditions on the deal,” Moffett said. “Realistically, there’s no way Charter could win a bidding war against Comcast, so there’s not much incentive to raise their bid.”
While Charter’s shares also have dropped, the company may be able to structure a more attractive offer by increasing the amount of cash it is willing to pay. Charter had previously told shareholders it would be willing to bump its bid to at least $39 billion, with cash accounting for about 70 percent of that, a person familiar with the matter said.
Comcast is defending its deal to lawmakers in Washington. The largest U.S. cable company is best suited to compete against current and new competition by acquiring Time Warner Cable, David Cohen, the company’s executive vice president, said April 8. He cited Google Inc., Apple Inc. and Netflix Inc. as three competitors with potential international reach, dwarfing Comcast’s regional U.S.-only footprint.
Critics, including Senator Al Franken, the Minnesota Democrat, argue Comcast would wield too much influence from increasing its broadband subscriber base by 56 percent to more than 32 million, including the 3 million that may be divested.
“This is too much size and not enough competition in these markets,” Franken said in an interview with Peter Cook on Bloomberg Television. “Even though they say satellite TV is a big competitor, no -- this is also broadband.”
If the deal is eventually struck down by regulators, Charter would be left as the most viable bidder for Time Warner Cable, one person said. That’s another reason not to compete with Comcast -- Charter doesn’t want raise its bid unnecessarily, said the person.
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