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Gun shy

Tue, 01/14/2014 - 1:24pm
Brian Santo

If there’s anybody who knows how to get screwed in a merger, it’s Time Warner Cable. TWC was a pawn in AOL’s acquisition of Time Warner, among the most disastrous mergers in history. Time Warner subsequently used TWC as a piggy bank it could bust open, emptying TWC of cash when it spun off the MSO.

So if there is any group of people who have a reason to be skittish about a low-ball takeover that has a shaky business rationale, it’s the executives at TWC.

Charter has been making overtures to TWC for months. Charter quietly made an offer at Christmas that TWC rejected. Charter subsequently went public with a bid.

This only a guess, but nobody should be surprised if we were to find out the second, public offer was essentially the same as the first one made in private.  

But since TWC is in play, the only question now is one about valuation. Charter’s bid is $132. TWC has been saying all along that anything below $160 will not be fair value for TWC investors.

TWC is trading at about $132 right now (its 52-week range is $85-$140), and in deals this huge between two parties that are both healthy enough, nobody has ever paid face value.

Part of the argument that $132 is fair is that TWC lost more basic subscribers than any other large MVPD – over 800,000 last year. This is considered a sign of mismanagement.

Maybe, maybe not. Almost every MSO has been losing customers on a pretty consistent basis, and TWC took its biggest hit in the quarter in which it had its showdown with CBS. That’s a fight every single other cable company wants to fight. TWC was the company that took a stand. Is that mismanagement? The answer will say more about the answerer than about TWC.

Some argue that TWC’s stock climbed to where it is perhaps only because its stock has been pumped up on takeover rumors. Possible, but a stock is worth what people will pay for it, and let’s recall that everybody in cable thinks that Wall Street improperly undervalues cable companies.

TWC says that by one key measure, the current bid is a non-starter. “First and foremost, it substantially undervalues TWC and would represent an EBITDA multiple of approximately 7X, well below past transactions in the cable sector.”

There’s another rule of thumb measure – far less formal than EBITDA multiples – for assessing cable company merger deals: cost per sub. At $62 billion and 11.5 million video customers, Charter is bidding about $5,400 per subscriber.

That’s a bit high, though not unheard in mergers of the largest MSOs, but this is also the first big cable acquisition in the multi-screen era. Broadband subscribers can legitimately be included in this calculation now. TWC claims a total of 15 million subscribers. Divide that figure into $62 billion and you get closer to $4,000 per subscriber, a figure that’s more typical in mergers among smaller MSOs. If you’re willing to calculate it that way, it bolsters TWC’s case that Charter’s bid is low.

An analyst at Jefferies thinks the final offer will be somewhere close to $150/share.

Macquarie Securities polled several dozen TWC shareholders; the vast majority don’t care if TWC remains independent, a clear majority want to see a bid in the $140-$150 range, and many want more cash and less stock in the composition of the bid.  

Charter is the fourth-largest cable operator in the U.S.; TWC is the second-largest, by number of basic subscribers. The combination would continue to be the second largest cable operator, but it would also leapfrog Dish Network to become the third-largest among all multichannel video program distributors (MVPDs), behind Comcast and DirecTV.

The deal would be the third largest in the world in the last 5 years, according to Bloomberg.

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