Whether it is Brazilian private equity giant 3G Capital and its favored partner Warren Buffett, or cable billionaire John Malone, the heaviest hitters in the world of dealmaking are showing an abundance of caution even as they spend what could be over $100 billion on acquisitions this year.
With plans to fund $4.3 billion of the deal's cash component through a stock offering to Liberty Broadband and outside investors, Charter is taking on less debt than it could have when buying Time Warner Cable and doling out more stock than many expected. As a result, the company will be levered at 4.5 times pro forma EBITDA, less than the 5x-to-6x estimates some had forecast.
The lower leverage is expected to allow existing Time Warner Cable bonds to maintain investment grade ratings , and provides a cushion in case financing markets cool or growth rates in the cable and broadband sector change materially.
Bright House Networks, a recently announced Charter acquisition, also restructured it $10.4 billion sale so it will receive a smaller cash payout, and a larger equity stake in the new company. Consequently, Time Warner Cable shareholders will own over 40% of the combined company, while Liberty Broadband and Bright House will own 19% and 13% of the company, respectively.
All told, it seems a fairly strong outcome both for investors and for customers of Charter, Bright House and Time Warner Cable, after the latter's long-gestating deal with
"The deal struck is the right balance in driving levered equity returns for all shareholders in the new company," Charter said on a call with investors Tuesday.
Charter's takeover of Time Warner Cable is similar in certain respects to Heinz's $40 billion takeover of Kraft Foods. In that mega merger, leverage also was relatively in check for an operator like 3G Capital that's historically shown an ability to work at far higher levels of indebtedness.
3G Capital-backed Heinz structured the deal so it paid only a $16.50-a-share cash dividend to shareholders, financed by a $10 billion commitment with the help of Buffett's Berkshire Hathaway. The remainder of the purchase price came through a stock-for-stock merger that gave existing Kraft Foods shareholders a 49% stake in the combined company.
As a result, the Kraft/Heinz's net debt is expected to be roughly 3.2-times EBITDA by 2017, according to JPMorgan calculations. Bond ratings for Heinz have been put on notice for an upgrade, and Kraft Foods is expected to retain its investment-grade status.
Best of all, however, is that Kraft Foods shareholders, like Time Warner Cable shareholders, will roll a significant piece of their stock into a combined company that's not overly indebted, nor hamstrung for future spending and acquisitions.
Perhaps it is a coincidence Charter and Heinz didn't reach as far as they could on their respective takeovers. However, when some of the brightest minds in finance take less cheap money than what's likely being offered to them on Wall Street, it's a sign that caution hasn't gone completely to the wind even as dealmaking reaches a fever pitch.
