Charter's takeover effort comes amid a bout of consolidation in the communications industry as operators look at mergers as a way of increasing scale and efficiency, while also serving new consumer habits such as the growing adoption of streaming video. It also represents a major new investment by billionaire John Malone in the U.S. cable industry. Malone's
Already, it's been a fast year for cable industry mergers. Earlier in 2015, Charter agreed to a $10.4 billion takeover of privately-held cable company Bright House Networks, and earlier in May European cable giant
With Time Warner Cable and Bright House, Charter will transform into an industry powerhouse with a significant presence in the Northeast, Southeast and western U.S. The combined company will serving 23.9 million customers in 41 states and is expected by analysts to have an enterprise value north of $115 billion, however, it is not expected to control over 30% of the U.S. broadband market.
Current Time Warner Cable shareholders will own between 41% and 44% of the combined company depending on how much cash they elect to take in the merger. Charter is offering an option for shareholders to take $115 a share in cast and 0.4562 shares of Charter for investors who would like a higher cash payout.
To help finance the cash portion of the deal, Charter said on Tuesday it would issue $4.3 billion of new shares to Liberty Broadband. That company will issue new shares, which have been purchased by Liberty Interactive, and a series of hedge fund investors including Coatue Management, Jana Partners and Soroban Partners. Liberty Broadband will own between 19% and 20% of the combined Charter-Time Warner Cable. Meanwhile, Bright House Networks will own between 13% and 14% of the combined company as a result of taking just $2.2 billion in cash and the balance in Charter stock and convertible debt in its sale.
"With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully–featured voice products, at highly competitive prices," Charter CEO Tom Rutledge said in a statement. "Put simply, the scale of New Charter, along with the combined talents we can bring to bear, position us to deliver a communications future that will unleash the full power of the two-way, interactive cable network," he added.
Rutledge will lead the combined company as president and CEO, and has agreed to sign a new five year contract as part of Tuesday's deal.
For Time Warner Cable, the deal with Charter is a quick recovery after anti-trust regulators blocked its merger with Comcast, the leading operator in the U.S., on grounds that the combined company would control too high of a portion of the U.S. broadband market.
Since the deal's bust roughly a month ago, CEO Robert Marcus has re-engaged suitors like Charter and new entrants like Altice. Ultimately, Marcus was able to negotiate a high payout to Time Warner Cable shareholders that will also allow them to own a significant piece of a new industry powerhouse.
“With today’s announcement, we have delivered on our commitment to maximizing shareholder value,” Marcus said in a statement. "Time Warner Cable is the obvious winner here; their management team deserves kudos for having played their hand masterfully," Craig Moffett, an analyst with MoffettNathanson Research said in a report Tuesday morning.
On a call with investors, Charter said it expects to realize $800 million of annual run rate synergies over the next three years, and generate significant tax savings. The combined company isn't expected to be a tax payer until 2018 or 2019 as a result of over $3 billion in net operating loss carryfowards Charter took from its 2009 bankruptcy exit.
Because Charter is issuing new shares to Liberty Broadband, Liberty Interactive and outside shareholders as a means to generate some funds for the cash portion of its offer, levering to roughly 4.5 times pro forma EBITDA, with the expectation that it will be able to quickly reduce debt burdens. The debt burden was also less than the 5 times EBITDA leverage levels Wall Street was expecting, according to Dave Heger, a communications analyst with Edward Jones.
The deal is subject to regulatory review and is expected to close by the end of 2015, a shorter timeframe than the over one-year regulatory review that Comcast endured before pulling its bid. While Comcast's offer contained no breakup fee, there will be a $2 billion fee as part of the Charter deal.
Nathan Miller, an assistant professor at Georgetown University who served as an economist at Department of Justice during the investigation of AT&T's failed $39 billion merger with T-Mobile, said antitrust risks in Charter's bid for Time Warner Cable are less than the deal Comcast offered. A combined Charter, Time Warner Cable and Bright House will have fewer subscribers and won't have the same vertical presence as Comcast, the owner of NBCUniversal.
Goldman Sachs and LionTree Advisors are serving as financial advisors to Charter on the Time Warner Cable deal, while Guggenheim Securities is a financial advisor to Charter. BofA Merrill Lynch and Credit Suisse are also financial advisors to Charter, and together with Goldman Sachs and UBS, are leading the financing for the transaction.
Law firms Wachtell, Lipton, Rosen & Katz is counsel to Charter and Kirkland & Ellis is representing Charter as financing counsel.
Morgan Stanley, Allen & Company, Citigroup and Centerview Partners are financial advisors to Time Warner Cable, while Paul, Weiss, Rifkind, Wharton & Garrison, Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom are legal advisors.
Shares in Charter rose nearly 2% in early trading, while Time Warner Cable shares rose over 5%.
