Charter Communications sought to upend the cable television industry on Monday, offering $37.8 billion to acquire Time Warner Cable, the country's second-largest cable operator.
If successful, Charter would take control of a leader in the lucrative business of providing cable television, high-speed Internet and phone services to millions of Americans' homes, placing itself in direct competition with Comcast, the industry leader.
But Charter, a smaller cable operator, faces several hurdles in its pursuit of Time Warner Cable. And Time Warner Cable made it clear that it was not interested in doing a deal at that price.
By offering $132.50 a share for Time Warner Cable, Charter is essentially matching the current market price. Time Warner Cable shares closed at $132.40 on Monday.
Including debt, the offer is valued at $61.3 billion. Moreover, Charter has yet to win over Time Warner Cable's management, or its shareholders.
Charter, backed by Liberty Media, owned by the billionaire John C Malone, has been courting Time Warner Cable for months. But efforts to enter into detailed discussions about a deal have failed.
So instead of pursuing negotiations, Charter is taking its case directly to shareholders. It will begin making its case to major owners of Time Warner stock, seeking to persuade them to vote for a deal. It has not started a tender offer for Time Warner Cable shares, however.
What is more, Charter faces the possibility that Comcast, the country's largest cable operator, will make an offer of its own for Time Warner Cable. The two companies have had talks about a deal in recent months.
"Charter has just put the ball in play," said Jim Nail, analyst at Forrester Research. "I would be very surprised not to see someone else come in."
Time Warner Cable said its board had unanimously rejected the proposal, which it called "grossly inadequate."
"Charter's latest proposal is a nonstarter," Robert D. Marcus, Time Warner Cable's chief executive, said in a statement on Monday. "Not only is the nominal valuation far too low, but because a significant portion of the purchase price would be in Charter stock, the actual value delivered to TWC shareholders could be substantially lower, given the valuation, operational and significant balance sheet risks embedded in Charter's stock."
Marcus went on to say that Time Warner Cable told Charter on December 27 that it was open to a deal valued at $160 per share, with $100 of that in cash and the rest in Charter stock. A deal at that price would value Time Warner Cable at $45.7 billion, about 21 per cent more than Charter's current offer not including debt.
Nonetheless, Charter's bid, which has been expected for months, kicks off a potential round of consolidation in the cable television industry at a time when the cable operators are seeking to increase their bargaining power with the cable and broadcast networks such as Fox, ESPN and CBS.
Charter says it believes its offer represents a significant premium. Thomas M Rutledge, Charter's chief executive, said that after he approached Time Warner Cable about a potential deal last June, the company's shares shot up 40 percent, largely on expectations of a deal.
"We think a lot of the premium is already in the stock," he said in an interview.
Yet even as Time Warner Cable's stock has risen, performance at the company has faltered. It has lost more than 500,000 pay television subscribers in recent quarters, and had mixed results with its Internet and telephone services.
"We think the company could be more successful," Mr. Rutledge said. Though he would not detail the projected benefits of a deal, Mr. Rutledge said that cost savings from combining sales and customer service functions, plus tax advantages, would make the deal viable.
He also took aim at Time Warner Cable's notoriously poor customer service, suggesting it was part of the reason the company has been losing business. "We don't think they need to be losing TV subscribers," Mr. Rutledge said. "Turning that around and bringing the other benefits creates value for all shareholders."
A potential deal between Charter and Time Warner Cable, which serves customers from Maine to California, could face scrutiny from antitrust regulators because it would combine two of the biggest cable operators.
The two companies do not have many overlapping markets, however, and when counting DirecTV, the satellite television operator as a competitor, "Charter and Time Warner together are still the third-largest player in the industry," Mr. Rutledge said.
Antitrust scrutiny would likely be of much greater concern for Comcast should it choose to chime in with an offer.
Should Charter go ahead with a deal with Time Warner, it would most likely need to take on substantial debt. The proposed deal is structured as a mix of $83 in cash and $49.50 in Charter stock. Charter said it had fully negotiated financing for the deal, and could quickly sign commitment letters with banks including Band of America-Merrill Lynch, Credit Suisse, Deutsche Bank and Goldman Sachs.
"There is a substantial amount of debt," Mr. Rutledge said. "But we think we can borrow it and de-lever the company relatively quickly."
A combination, he argued, would benefit both Charter shareholders and Time Warner Cable shareholders, who would own about 45 percent of a newly combined company.
Charter made its offer in the form of a so-called bear hug letter addressed from Mr. Rutledge and sent to Mr. Marcus, who took over as chief executive of Time Warner Cable at the first of the year.
In the letter, Mr. Rutledge alluded to deal talks the two men and their chief financial officers had in December, and to offers made in June and October of last year. But Mr. Rutledge said there appeared to be "no genuine interest from Time Warner Cable management and board of directors to engage on this opportunity."
Instead, Mr. Rutledge, who took control of Charter in 2012, said his company would begin sounding out Time Warner Cable shareholders to gauge their interest in a deal at the offer price. Though Charter has not made a tender offer for Time Warner Cable shares, Mr. Rutledge did not rule out the possibility of making a hostile bid.
Even before Liberty Media invested in Charter last year, Mr. Rutledge said he was interested in striking a deal with Time Warner Cable.
But when Liberty, where Mr. Malone is chairman and known as the King of Cable, joined the board, discussions about how to strike a deal intensified. Along with Liberty Media's president and chief executive officer, Gregory B. Maffei, who is also on the Charter board, Mr. Malone supports further consolidation in the cable industry.
"John Malone is one of the most experienced investors in the cable industry and Greg is an experienced C.E.O.," Mr. Rutledge said. "Having them validate our point of view was a nice thing."
In recent years, broadcast and cable networks have been demanding higher fees from cable operators like Time Warner Cable and Charter for the rights to carry their programming. Spats between the two sides have led to numerous blackouts of popular content, most notably when CBS was unavailable to Time Warner Cable subscribers last year.
"Consolidation makes a huge amount of sense," said Mr. Nail. "In order for the cable operators to get some clout, they just need to get bigger, so they can have a credible threat of inflicting damage to the networks if they pull their content. It is a good moment to strike."
Goldman Sachs, LionTree Advisors and Guggenheim Securities are advising Charter. Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis are providing legal advice. Bloomberg News was the first to report the details of Charter's offer.
Morgan Stanley, Allen & Company and Citigroup are advising Time Warner Cable, and Paul, Weiss, Rifkind, Wharton & Garrison is serving as legal counsel.
©2014 The New York Times News Service
If successful, Charter would take control of a leader in the lucrative business of providing cable television, high-speed Internet and phone services to millions of Americans' homes, placing itself in direct competition with Comcast, the industry leader.
But Charter, a smaller cable operator, faces several hurdles in its pursuit of Time Warner Cable. And Time Warner Cable made it clear that it was not interested in doing a deal at that price.
By offering $132.50 a share for Time Warner Cable, Charter is essentially matching the current market price. Time Warner Cable shares closed at $132.40 on Monday.
Including debt, the offer is valued at $61.3 billion. Moreover, Charter has yet to win over Time Warner Cable's management, or its shareholders.
Charter, backed by Liberty Media, owned by the billionaire John C Malone, has been courting Time Warner Cable for months. But efforts to enter into detailed discussions about a deal have failed.
So instead of pursuing negotiations, Charter is taking its case directly to shareholders. It will begin making its case to major owners of Time Warner stock, seeking to persuade them to vote for a deal. It has not started a tender offer for Time Warner Cable shares, however.
What is more, Charter faces the possibility that Comcast, the country's largest cable operator, will make an offer of its own for Time Warner Cable. The two companies have had talks about a deal in recent months.
"Charter has just put the ball in play," said Jim Nail, analyst at Forrester Research. "I would be very surprised not to see someone else come in."
Time Warner Cable said its board had unanimously rejected the proposal, which it called "grossly inadequate."
"Charter's latest proposal is a nonstarter," Robert D. Marcus, Time Warner Cable's chief executive, said in a statement on Monday. "Not only is the nominal valuation far too low, but because a significant portion of the purchase price would be in Charter stock, the actual value delivered to TWC shareholders could be substantially lower, given the valuation, operational and significant balance sheet risks embedded in Charter's stock."
Marcus went on to say that Time Warner Cable told Charter on December 27 that it was open to a deal valued at $160 per share, with $100 of that in cash and the rest in Charter stock. A deal at that price would value Time Warner Cable at $45.7 billion, about 21 per cent more than Charter's current offer not including debt.
Nonetheless, Charter's bid, which has been expected for months, kicks off a potential round of consolidation in the cable television industry at a time when the cable operators are seeking to increase their bargaining power with the cable and broadcast networks such as Fox, ESPN and CBS.
Charter says it believes its offer represents a significant premium. Thomas M Rutledge, Charter's chief executive, said that after he approached Time Warner Cable about a potential deal last June, the company's shares shot up 40 percent, largely on expectations of a deal.
"We think a lot of the premium is already in the stock," he said in an interview.
Yet even as Time Warner Cable's stock has risen, performance at the company has faltered. It has lost more than 500,000 pay television subscribers in recent quarters, and had mixed results with its Internet and telephone services.
"We think the company could be more successful," Mr. Rutledge said. Though he would not detail the projected benefits of a deal, Mr. Rutledge said that cost savings from combining sales and customer service functions, plus tax advantages, would make the deal viable.
He also took aim at Time Warner Cable's notoriously poor customer service, suggesting it was part of the reason the company has been losing business. "We don't think they need to be losing TV subscribers," Mr. Rutledge said. "Turning that around and bringing the other benefits creates value for all shareholders."
A potential deal between Charter and Time Warner Cable, which serves customers from Maine to California, could face scrutiny from antitrust regulators because it would combine two of the biggest cable operators.
The two companies do not have many overlapping markets, however, and when counting DirecTV, the satellite television operator as a competitor, "Charter and Time Warner together are still the third-largest player in the industry," Mr. Rutledge said.
Antitrust scrutiny would likely be of much greater concern for Comcast should it choose to chime in with an offer.
Should Charter go ahead with a deal with Time Warner, it would most likely need to take on substantial debt. The proposed deal is structured as a mix of $83 in cash and $49.50 in Charter stock. Charter said it had fully negotiated financing for the deal, and could quickly sign commitment letters with banks including Band of America-Merrill Lynch, Credit Suisse, Deutsche Bank and Goldman Sachs.
"There is a substantial amount of debt," Mr. Rutledge said. "But we think we can borrow it and de-lever the company relatively quickly."
A combination, he argued, would benefit both Charter shareholders and Time Warner Cable shareholders, who would own about 45 percent of a newly combined company.
Charter made its offer in the form of a so-called bear hug letter addressed from Mr. Rutledge and sent to Mr. Marcus, who took over as chief executive of Time Warner Cable at the first of the year.
In the letter, Mr. Rutledge alluded to deal talks the two men and their chief financial officers had in December, and to offers made in June and October of last year. But Mr. Rutledge said there appeared to be "no genuine interest from Time Warner Cable management and board of directors to engage on this opportunity."
Instead, Mr. Rutledge, who took control of Charter in 2012, said his company would begin sounding out Time Warner Cable shareholders to gauge their interest in a deal at the offer price. Though Charter has not made a tender offer for Time Warner Cable shares, Mr. Rutledge did not rule out the possibility of making a hostile bid.
Even before Liberty Media invested in Charter last year, Mr. Rutledge said he was interested in striking a deal with Time Warner Cable.
But when Liberty, where Mr. Malone is chairman and known as the King of Cable, joined the board, discussions about how to strike a deal intensified. Along with Liberty Media's president and chief executive officer, Gregory B. Maffei, who is also on the Charter board, Mr. Malone supports further consolidation in the cable industry.
"John Malone is one of the most experienced investors in the cable industry and Greg is an experienced C.E.O.," Mr. Rutledge said. "Having them validate our point of view was a nice thing."
In recent years, broadcast and cable networks have been demanding higher fees from cable operators like Time Warner Cable and Charter for the rights to carry their programming. Spats between the two sides have led to numerous blackouts of popular content, most notably when CBS was unavailable to Time Warner Cable subscribers last year.
"Consolidation makes a huge amount of sense," said Mr. Nail. "In order for the cable operators to get some clout, they just need to get bigger, so they can have a credible threat of inflicting damage to the networks if they pull their content. It is a good moment to strike."
Goldman Sachs, LionTree Advisors and Guggenheim Securities are advising Charter. Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis are providing legal advice. Bloomberg News was the first to report the details of Charter's offer.
Morgan Stanley, Allen & Company and Citigroup are advising Time Warner Cable, and Paul, Weiss, Rifkind, Wharton & Garrison is serving as legal counsel.
©2014 The New York Times News Service