US cable MSO Charter Communications has confirmed that it has sent a letter to Time Warner Cable proposing that the companies immediately engage in discussions to conclude a merger agreement to combine the companies in what has been estimated at a $61.3 billion deal. The proposed merger would be one of the largest cable deals ever, behind America Online’s $106 billion merger with Time Warner Inc. in 2001, and Comcast’s $60 billion acquisition of AT&T Broadband–which included systems owned previously by MediaOne and TCI – in 2002. Time Warner Cable responded by describing the proposal as “grossly inadequate”.
Charter 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 and allowing Time Warner Cable shareholders to participate at a substantial premium to Time Warner Cable’s unaffected stock price as well as meaningful upside following completion.
Charter has made repeated overtures to Time Warner Cable on this topic for more than six months. Until December, Time Warner Cable chose not to engage or find out more. The CEOs and CFOs respectively met in December to walk through Charter’s plan including the structure, financing, tax and cash flow aspects of a transaction, but the flow of information has been exclusively one-way. Because Time Warner Cable’s stock has run up on widespread shareholder endorsement of a deal to the point where the premium is already reflected in the share price, Time Warner Cable’s response led Charter to determine there is no genuine intent from Time Warner Cable’s management and Board of Directors to engage in a merger agreement, and that it is prudent to bring the matter to shareholders directly. The full text of the letter is set out below.
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
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,
Thomas M. Rutledge, President and Chief Executive Officer
The Time Warner Cable Board of Directors unanimously rejected what it described as a “grossly inadequate” proposal, saying it was well below comparable transaction multiples.
The Board noted that the proposal was described only generally in a letter received today from Charter as being in the “low $130s.” Based on an interview with Charter CEO, Tom Rutledge, Bloomberg reported that the offer was for $132.50, consisting of $83.00 in cash and $49.50 in Charter stock. Charter had previously offered cash and stock nominally valued at approximately $114 in June and approximately $127 in October.
Rob Marcus, Time Warner Cable’s Chairman and Chief Executive Officer, said: “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 realise that value and benefit from the unique position of the company.”
Marcus continued, “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 maximising 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 per cent 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.”
N.J. Nicholas, Jr., the independent lead director of the TWC Board, added, “The Board takes very seriously its obligation to maximise shareholder value and, on that basis, we gave Charter our bottom line. The Charter proposal doesn’t come close to providing our shareholders with the kind of value and protections they should expect in a transaction. In fact, it would transfer significant value from our shareholders to Charter shareholders, while dramatically increasing the risk profile for our shareholders. As such, it is wholly inconsistent with the interests of our investors and our responsibilities as a Board.”