The August 10th news that French multinational cable, fibre, telecommunications, content and media group Altice is preparing a bid for US cable giant Charter Communications prompted equity analysts at MoffettNathanson to write a hard-hitting comment, saying – in essence – that the bid made no financial sense at all.
Indeed, Craig Moffett poured scorn on the complete process, saying would the few companies which have NOT taken a close look at Charter please step forward, and said energy company ExxonMobil hadn’t made a bid, nor had Proctor & Gamble and surely it was only a matter of time before Elon Musk’s Tesla made a bid!
These are light-hearted comments, but Moffett then shrewdly drills down into the numbers of the various media-related M&A permutations that have made headlines over the past weeks, but adding that things had now “gotten absurd”.
Moffett gives his reasons, broken down into the money, and starting with Charter. “None of the proposed suitors – Verizon, SoftBank, Altice – have the balance sheet to acquire Charter. At $400 per share, Charter already sports a market cap of $120B. They have another $63B of debt. None of the three have the kind of balance sheet capacity to do a deal for a premium to today’s $400 without either blowing their leverage ratios (if they use all or mostly cash) or issuing paper that no buyer, least of all Liberty, would be interested in taking.”
Moffett continues, saying: “Liberty CEO Greg Maffei quite rationally and politely made this point two days ago on their earnings call. Sure, they will listen to any and all offers, but… well, come on. Liberty would almost certainly not want cash lest they owe an outsized tax on their capital gain. But they are no more likely to want equity either. Remember, the equity in any NewCo would have to be more attractive than the equity he already has (and by quite a large margin, since he/Liberty would be ceding control). Let’s say Altice believes they can get Charter to 50% margins and 12% capital intensity, and that by 2020 they would be able to get to, say, 45% and 13%, respectively. Yes, that’s better than what is in consensus for Charter… but what matters isn’t what’s in consensus, it’s what’s in Liberty and Charter’s internal plans. Say their own plans call for 43% and 13% by 2020. On $50B of revenue, that 2% difference would be worth about $1B. Capitalized at 10x, that’s worth about $33 per share. Would that be enough for John Malone to want to relinquish control? Of course not. And, by the way, that would only be if Malone and Liberty believed in even that small difference.”