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TWC rejects ‘grossly inadequate offer’ from Charter

Tue, 01/14/2014 - 11:36am
Mike Robuck

The gloves are off in Charter Communications’ attempt to takeover Time Warner Cable.

 Late Monday afternoon, Charter Communications issued a press release that included a letter from CEO Tom Rutledge to Time Warner Cable CEO Rob Marcus. Charter has offered to buy the nation’s second largest cable operator for $132.50 a share, which was slightly higher than where Time Warner Cable’s shares closed on Monday.

That proposal valued Time Warner Cable at more than $61 billion and included debt. Charter’s offer included about $83 cash per share and roughly $49.50 in Charter stock.

Monday night Time Warner Cable CEO Rob Marcus, who took over as CEO of the nation’s second-largest cable operator on Jan. 1, formally rejected Charter’s third offer.

While Rutledge indicated he was still willing to work with Marcus and Time Warner Cable’s board of directors, another the purpose of the public letter was a direct appeal to Time Warner Cable shareholders to pressure management into accepting the offer.

Time Warner Cable shareholders could decide to vote in new directors that are more receptive to Charter’s takeover attempt. The process for naming new board members starts this week.

If nothing else, Marcus’ response to Rutledge set the going rate for what Time Warner Cable was willing to accept.

“Charter’s latest proposal is a non-starter,” Marcus wrote. “Our job above all is to act in the best interests of our shareholders. We are not seeking to sell the company, but consistent with what we have always said about maximizing shareholder value, on December 27 we made it clear to Charter that our board is open to a transaction with Charter at a price of $160 per TWC share, consisting of $100 in cash and $60 per share of Charter common stock, subject to a symmetrical 20 percent collar to protect our shareholders on the value of Charter shares, which currently trade at a historically high multiple. The $160 price represents a forward multiple of only approximately 8X. 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."

Charter had previously offered cash and stock nominally valued at approximately $114 in June and approximately $127 in October.

In yesterday’s press release, Charter Communications said it had made repeated overtures to Time Warner Cable over the past six months, but Time Warner Cable chose not to respond

Late last month, Rutledge and Charter chief Financial officer Chris Winfrey did finally meet in person with Marcus and Time Warner Cable chief financial officer Artie Minson in order to go over Charter’s offer, including structure, financing, tax and cash flow implications, according to Rutledge’s letter. At that time, Charter made an offer of around $130 per share, with the $83 cash component. Under Charter’s December proposal, Time Warner Cable shareholders would have owned about 45 percent of the new company.

“We believed Time Warner Cable and its board of directors would recognize the significant value of this combination and genuinely engage,” Rutledge wrote. “Instead, you came back with a verbal offer at an unrealistic price expectation which ignores a full 39 percent 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 percent ownership in the upside of the proposed transaction.”

Charter Communications bid is backed by cable legend John Malone, who invested $2.6 billion for a 27 percent stake in Charter last year through his Liberty Media.

Malone and Rutledge have touted the economies of scale that would result from combining the nation’s second largest cable operator with No. 4 Charter. The combined company would also, in theory, have more clout during retransmission negotiations, and a broader base for technology developments.

After a month-long blackout with CBS last year, Time Warner Cable announced it had lost more than 300,000 basic video subscribers in the third quarter. Speaking at an investment conference earlier this month, Minson said Time Warner Cable lost 215,000 video customers in the fourth quarter, but the company had its “mojo back.”

Rutledge, who formerly worked at Time Warner Cable before going to Cablevision, has maintained that Time Warner Cable has been poorly managed.

“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,” Rutledge wrote. “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.”

Charter isn’t the only cable operator stalking Time Warner Cable. Comcast and Cox Communications are also reportedly interested.

Letter sent To Time Warner Cable management

January 13, 2014
Time Warner Cable Inc.
60 Columbus Circle
New York, New York 10023
Attention: Robert D. Marcus
Chairman and Chief Executive Officer

Dear Rob:

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 percent 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 percent 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

Marcus’ response to Rutledge

Charter’s latest proposal 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. Indeed, our high-quality assets, unique scale, synergy potential, growth opportunities and strong financial position should command a premium valuation compared to precedent transactions, not the discount offered by Charter. 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.

TWC is a one-of-a-kind company. We are 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. We have an incredibly robust network, having invested almost $15 billion in CAPEX since our separation from Time Warner Inc. in 2009. We are continually enhancing the capacity of that network to support future growth and expansion of our product offerings, adding significantly faster data speeds and advanced multi-platform video offerings. In short, we’re in a great business and confident we have the right assets, the right people and the right strategic plan to deliver great experiences to our customers and create significant value for our shareholders. Our shareholders deserve to realize that value and benefit from the unique position of the company.”

Our job above all is to act in the best interests of our shareholders. We are not seeking to sell the company, but consistent with what we have always said about maximizing shareholder value, on December 27 we made it clear to Charter that our board is open to a transaction with Charter at a price of $160 per TWC share, consisting of $100 in cash and $60 per share of Charter common stock, subject to a symmetrical 20 percent collar to protect our shareholders on the value of Charter shares, which currently trade at a historically high multiple. The $160 price represents a forward multiple of only approximately 8X. 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.

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