Debt holders shouldn’t be as enthusiastic as stock buyers seem to be about the talk of a possible marriage between Time Warner Cable and Charter Communications, Moody’s Investors Service warns today. Liberty Media’s John Malone fanned the speculation of a possible deal after his company paid $2.6B for a 27.3% stake in Charter. That has contributed to a 14.6% jump in Time Warner Cable‘s stock price over the last month. But Charter, with a market value of $12.7B, might bite off more than it can chew if it goes after TWC, which is valued at $31.9B but probably would cost a buyer much more. Even if Malone paid for half of the $40B that might have to be borrowed to make a credible offer, the company created by a Charter-TWC merger would be left with about $60B in debt, “making it the largest high-yield non-financial corporate issuer by far and among the ten largest investment grade non-financial corporate issuers,” Moody’s SVP Neil Begley says. Charter’s need to borrow for a megadeal “would likely result in higher credit risk for bondholders” since Malone “would likely want to limit his dilution and exert effective control in the transaction or series of transactions.” Lenders also are at risk because their agreements with TWC don’t give them special rights if there’s a change in control. And the company doesn’t have a dominant shareholder (like the ones at family-controlled companies including Comcast, News Corp, Viacom, and Cablevision) who could block a deal that might favor stock investors over bond holders. TWC could try to thwart Malone by snapping up mid-sized cable companies — Cablevision, perhaps. But that could also hurt TWC’s bond ratings. TWC has another option which Begley calls “the Godfather film’s ‘Moe Green’ strategy” ‘You don’t buy Moe Green, Moe green buys you!’ So instead of Charter buying TWC, TWC could put in a bid to buy Charter taking out all of its $12 billion of equity at a premium (otherwise Dr. Malone will be inside the gate).”
Time Warner Cable Debt Holders Should Worry If Charter Comes Knocking: Moody’s
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