Time Warner Cable offered sweet deal

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Bloomberg

Rob Marcus, president and chief operating officer of Time Warner Cable, has become a shareholders hero. Picture: Andrew Harrer/Bloomberg.

New York - Rob Marcus morphed into a hero for Time Warner Cable shareholders only 44 days into his tenure as chief executive of the cable-TV company.

Marcus, 48, this week announced a surprise $45 billion (R492bn) sale to Comcast Corporation, securing almost 20 percent more for shareholders than John Malone-backed Charter Communications had offered.

While Marcus refused to engage with Charter chief executive Tom Rutledge after rejecting his bid, he encouraged Comcast to acquire the entire company and preferred working with Comcast chief Brian Roberts, according to sources.

The sale will create a more dominant cable competitor against phone and satellite providers, in a deal that Time Warner Cable shareholder John Paulson has called a “dream combination” with “the most capable acquirer”. Comcast, which has a market value 10 times the size of Charter, is offering Time Warner Cable investors a less volatile stock, according to data compiled by Bloomberg. Shareholders will also gain a stake in a company with about half the leverage of Charter.

“It’s really kind of a sweetheart deal,” said Peter Zeuli, the chief investment officer of Philadelphia Investment Partners.

“Time Warner Cable shareholders got a terrific offer because, while the balance sheet is leveraged, Comcast is a pretty strong entity when it comes to financing.

“With Charter being in a more precarious financial condition than Comcast, Comcast maybe has a little more leeway with shareholders.”

Zeuli’s company used call options to bet on a rise in Time Warner Cable’s shares.

Both Marcus and Roberts saw themselves as running dual-track processes, said people familiar with the matter, preparing for scenarios where Time Warner Cable ended up with Charter or Comcast. Comcast and Charter had been negotiating an asset sale after a potential Charter acquisition of Time Warner Cable, according to the people.

Marcus said in December he had a close relationship with Roberts and didn’t know Malone well. He decided that a Comcast-Time Warner Cable merger would produce a better balance sheet with less debt and more cost savings, said these people. Marcus stands to receive more than $50 million in an exit package in the event of a sale, according to filings.

The deal to combine the two largest American cable companies came just two days after Charter nominated a slate of directors for Time Warner Cable’s board. Investors will receive 2.875 Comcast shares for each of their shares, valuing Time Warner Cable at $158.82 apiece based on Comcast’s closing price on February 12. Charter had offered $132.50 in stock and cash.

Not only was Comcast’s offer higher than Charter’s, it was also giving Time Warner Cable shareholders a piece of a stronger merged entity, according to Grayson Witcher, a Calgary-based money manager at Mawer Investment Management, which oversees about $20bn, including shares of Time Warner Cable and Comcast.

“Comcast is probably a better buyer for Time Warner Cable shareholders,” Witcher said.

“This deal actually improves the business coming out and has less risk. It’s a company with lower debt and a better credit rating.”

Charter’s 90-day historical volatility, a measure of price swings, is 25.7, versus 21 for Comcast, data compiled by Bloomberg show.

Charter also carries more debt relative to profit. Its ratio of total debt to trailing 12-month earnings before interest, taxes, depreciation and amortisation is 5.3, versus 2.2 for Comcast, the data show.

While Comcast’s leverage may rise above its targeted level when it acquired Time Warner Cable, the company said it expected net leverage to return to 2.2 by the end of the year.

Comcast could offer both a higher price and a stronger competitive position, said George Shipp, a fund manager at Sterling Capital Management, which oversees about $45bn and owns both Time Warner Cable and Comcast shares.

“An ostensibly stronger currency at a significantly higher price than what Charter had put on the table so far, that’s kind of a no-brainer,” Shipp said yesterday from Virginia Beach, Virginia. “I’m happier today than I was yesterday.”

He added that while regulators were likely to examine the deal closely, Comcast was a proven acquirer and had experience navigating the approval process.

To help appease regulators, Comcast said it was prepared to divest about 3 million subscribers to keep its market share below 30 percent.

Time Warner Cable’s demand for $160 a share looked smart now, pointed out Joshua Linder, an assistant fund manager at Calvert Investments, which oversees more than $12bn, including Time Warner Cable shares.

“They reiterated several times that they felt Charter was low-balling them,” Linder said from Bethesda, Maryland.

“Fortunately, they were able to have a white knight come in at the last minute and really validate their position of what they thought the company was worth.” – Tara Lachapelle and Brooke Sutherland from Bloomberg


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