UPDATE, 4:30 PM: Let the debate begin. Time Warner Cable CEO Rob Marcus says he’s willing to sell the No. 2 cable operator — but Charter’s $132.50 a share offer, valued at $61.3B including debt, is “a non-starter” that “substantially undervalues TWC.” The price, at 7 times EBITDA (a measure of cash flow), is “well below past transactions in the cable sector.” And since much of the payment would be in Charter shares, 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 says that TWC deserves much more because it’s “the only large pure-play, non-family controlled cable operator in the United States, with 15 million customers in some of the country’s best markets” including New York City and Los Angeles. What would be a fair price? Marcus says the board “is open to a transaction with Charter at a price of $160 per TWC share” with at least $100 in cash. “We gave Charter our bottom line, but rather than pursuing this path, Charter has chosen to go public with its third low-ball offer trying to pressure TWC’s Board into selling the Company at a grossly inadequate price.” TWC’s receiving financial advice from Morgan Stanley and Allen & Company and legal counsel from Paul, Weiss, Rifkind, Wharton & Garrison.
PREVIOUS, 1:22 PM: Charter’s interest in the No. 2 cable company is no surprise — but the terms of the formal proposal suggest that we’re in for a lengthy, public battle. Charter says that it will campaign for Time Warner Cable shareholders to support its $132.50 a share offer which TWC execs have already rejected. Valued at $61.3B including debt, the price offers virtually no premium on top of TWC’s closing price Monday of $132.40. Charter’s CEO Tom Rutledge told Bloomberg that he made the proposal in a letter to TWC’s new chief Rob Marcus — but “we haven’t received a serious response.” As a result, “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.” TWC shares have appreciated about 15% over the last six months as it became evident that Charter and its largest shareholder, John Malone’s Liberty Media, were preparing to make an offer. The proposal consists of $83 in cash and $49.50 in Charter stock for each TWC share. That would give TWC shareholders a 45% stake in Charter. The company says that it “believes that, unlike substantially all other cable transactions over the last five years that were cash transactions, this transaction would be based on combining shareholder groups” giving TWC investors “meaningful upside following completion.” TWC execs wanted a higher offer, at least $150 a share, and more cash. In a letter to the company today, Rutledge called TWC’s expectations “unrealistic.” He added, in his conversation with Bloomberg, that TWC’s value could decline without a deal. “Since we made our first proposal, Time Warner Cable has lost another half million video customers. 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.” (TWC lost 304,000 video subscribers in Q3 which included more than a month without CBS.) Charter shares are +1.7% in post market trading while TWC is +1.5% to $134.42 — which indicates a belief that Charter, or someone else, will raise the stakes.
Charter says Goldman Sachs and Aryeh Bourkoff’s LionTree Advisors were its lead financial advisers — with help from Guggenheim Securities, BofA Merrill Lynch, Credit Suisse, and Deutsche Bank Securities. Legal matters were handled by Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis.
Here’s Rutledge’s letter to TWC today:
I enjoyed spending time with you in December discussing our prior proposals and the challenges our industry faces. As you know, I believe we have a significant opportunity to put our companies together in a way that will create maximum, long-term value for shareholders and employees of both companies. Our financing plan, which gives us the ability to deleverage during a period where our operating plan has sufficient time to be implemented, is prudent. Our history of operating performance is well understood, as are our tax assets.
As you know, Time Warner Cable quickly rejected our proposals in June and October, and refused to engage until we met in December. I communicated a willingness to submit a revised proposal in the low $130s, including a cash component of approximately $83. Following our meeting, you agreed to have our CFOs meet to review the structure, financing, tax and cash flow aspects of a transaction, which we understand was very helpful for Time Warner Cable. We believed Time Warner Cable and its Board of Directors would recognize the significant value of this combination and genuinely engage. Instead, you came back with a verbal offer at an unrealistic price expectation which ignores a full 39% premium already reflected in Time Warner Cable’s stock (as of last Friday), widespread shareholder endorsement of a deal, and Time Warner Cable shareholders’ approximately 45% ownership in the upside of the proposed transaction. Furthermore, your proposal to significantly increase the cash component of the price contradicts Time Warner Cable’s own public statements on debt leverage. The information provided to date has been exclusively one-way, which further reinforces the point that there is no genuine interest from Time Warner Cable management and Board of Directors to engage on this opportunity.
While we are preserving all options going forward, we remain open to real engagement. We would like to engage with you to conclude an agreement for a business combination that is beneficial for your shareholders and ours. We would be prepared to offer a cash/stock election mechanism that would allow those shareholders who wish to participate in the benefits of a combination to do so, while others who wish to cash out will be able to do so at a meaningful premium. The financing to complete this transaction is fully negotiated, and we can be in a position to sign commitment letters in a matter of days.
This transaction is beneficial to Time Warner Cable shareholders who remain invested in the combined company because they realize the value creation from cost reductions, faster organic growth, and leveraged and tax advantaged returns. We also believe that the new combined company, through potential future swaps and divestitures with other industry participants, can help rationalize the geographic holdings of the industry into more efficient entities capable of providing better services and products into a very competitive marketplace, thus generating higher returns for the combined company and the industry at large.
We are fully prepared to finalize a deal on an extremely expedited basis. We believe that time is of the essence to prepare our companies to meet the challenges of the industry, which is why we have decided to announce the status of our discussions to date to both sets of shareholders.
With best regards, /s/ Tom
Thomas M. Rutledge, President and Chief Executive Officer