The battle for the future of Time Warner Cable is becoming heated and unusually public, defying the protocol of what is usually a fairly cozy fraternity among cable guys.
Charter Communications’ pursuit of TW Cable is also shaping up to be the first megabucks hostile takeover efforts the media biz has seen in a while, with the exception of Carl Icahn’s quixotic excursions into Lionsgate and Time Warner. That makes it a compelling spectator sport for bizzers and Wall Streeters.
But more significantly, Charter’s dogged pursuit of TW Cable is a sign that the operators feel a pressure to bulk up at a time when the media landscape is changing dramatically and financial strains between distributors and content companies are at an all-time high. Even the cable operators that are the nation’s largest providers of the broadband access that makes the new media world go-round are nervous about where the content consumption trends are heading as the first generation of millennials raised with the Internet as a household appliance enters adulthood.
Charter, controlled by longtime cable mogul John Malone’s Liberty Media, went public Monday with a takeover offer that values TW Cable at $61 billion, or $82.54 per share in cash plus the equity exchange of 0.372 Charter shares. Charter maintains that pushes the value of the offer to $132.50 per share. TW Cable shares have shot up 13% since late November as acquisition rumors increased, closing Tuesday at $132.40.
TW Cable brass quickly rejected the offer, declaring it to be “grossly inadequate.” Charter followed on Tuesday with the release of a 30-page investor presentation and conference call to make its case for the acquisition to shareholders.
The presentation basically boiled down to: TW Cable is lacking operationally on all fronts, the Charter management team can do better, and the TW Cable board is smoking something (Liberty Media is based in Colorado, after all) if they think there’s going to be a more strategically suited offer.
Or as the presentation put it: “Minimal engagement, one-way information flow and unrealistic price expectations led us to conclude there is no genuine interest from TWC management and its board to pursue a transaction, and we decided to bring the status of the discussions to shareholders to encourage engagement by TWC, while at the same time preserving our options.”
TW Cable responded Tuesday with a short statement that boiled down to: drop dead.
“We are confident in our standalone plan and we are not going to let Charter steal the company,” the statement said.
On Wednesday, Time Warner Cable released its own presentation for investors. Again, its main argument is that the latest Charter offer is insufficient and undervalues TW Cable. The only deal of comparable size in the cable industry was Comcast’s 2002 acquisition of AT&T Broadband, originally valued at $72 billion, or 21 times earnings before interest, taxes, depreciation and amortization (EBITDA), Time Warner Cable noted. The most recent Charter bid for TW Cable is 7.2 times projected 2014 EBITDA.
A Charter-TW Cable union would bolster TW Cable’s status as the nation’s No. 2 cable operator behind Comcast with about 15.6 million subscribers, compared with about 11 million at present for TW Cable. It would still keep the combined entity No. 3 in the overall MVPD market behind satcaster DirecTV.
Charter’s presentation included a detailed timeline of its discussions with Time Warner Cable, which began on June 24 with a face-to-face meeting. On July 10, Charter sent a letter offering $79.11 per share plus stock. That was batted back by TW Cable the following day.
Then was three months of radio silence. During this period, TW Cable engaged in a monthlong losing battle with CBS Corp. over carriage of CBS stations and Showtime, which fueled losses of some 306,000 subscribers during the third quarter — a black eye that only gives more ammo to Charter’s “we can do better” pitch to investors.
On Oct. 24, Charter sent a letter sweetening its offer to $82.54 per share and a larger exchange of Charter shares. This time the TW Cable board took a week before rejecting it at the witching hour on Oct. 31.
On Dec. 6, Charter CEO Tom Rutledge and TW Cable’s then-incoming CEO Rob Marcus, who assumed the reins this month from the long-serving Glenn Britt, had a face-to-face sit down. The following week, Rutledge indicated the company’s willingness to further sweeten the offer.
On Dec. 17 and Dec. 23, Charter and TW Cable CFOs had face-to-face meetings. On Dec. 27, TW Cable made what Charter describes as a “verbal counter proposal” — presumably this is when they communicated that only an offer in the “low $130s” would get their attention, according to Charter’s past statements.
Charter argues that TW Cable’s current stock price is artificially inflated because Charter’s interest in a deal sparked heat on Wall Street and goosed interest in the company from other cable giants, including Comcast Corp. and Cox. Charter maintains that the $82.54 per share cash offer plus the stock swap amounts to a 38% premium for TW Cable shareholders on its “undisturbed” share price prior to the run-up.
The drama surrounding all the wrangling is heightened by the fact that it’s not just any old cable operator going after TW Cable. John Malone was the undisputed titan of the cable biz in the 1980s and ’90s with Tele-Communications Inc., when he was not-so-affectionately dubbed “Darth Vader” because of the clout his company wielded over programmers and industry rivals.
Malone sold TCI in 1998 to AT&T for $55 billion. At the time, TCI had about 13 million subscribers. Malone has stayed out of the U.S. MVPD business since then, but now the exiled king wants to return, to a bigger kingdom. And he’s willing to fight for it.
Todd Spangler contributed to this report.