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Charter Seen Eyeing Cox After Time Warner Cable Rebuff: Real M&A
2014-02-18 00:00:00.1 GMT
(For more news on the Comcast-TWC deal, see EXT2 <GO>.)
By Brooke Sutherland
Feb. 18 (Bloomberg) -- Charter Communications Inc. may not
lick its wounds for long before trying to grab another piece of
the consolidating U.S. cable industry.
Comcast Corp. Chief Executive Officer Brian Roberts swooped
in last week to buy Time Warner Cable Inc. for $45 billion,
nabbing the second-largest U.S. cable provider out from under
Charter CEO Tom Rutledge’s nose. Charter, John Malone’s Liberty
Media Corp. and advisers are having a board meeting next week to
discuss options, according to a person familiar with the matter.
While Charter is unlikely to match Comcast’s bid, it will
probably buy some of the 3 million subscribers Comcast plans to
divest and then set its sights on another target, said Paul
Sweeney of Bloomberg Industries. Closely held Cox Communications
Inc., the industry’s No. 3 provider with about 4.4 million
subscribers, may be an attractive consolation prize to bolster
Charter’s subscriber ranks, said CRT Capital Group LLC. Bright
House Networks LLC and Suddenlink Communications also could help
Charter expand, said Raymond James Financial Inc.
Charter and billionaire Malone “have already made it clear
that scale is important in this industry,” Lance Vitanza, a
Stamford, Connecticut-based managing director and analyst at
brokerage CRT Capital, said in a phone interview. “At this
point the most likely strategy is to accept defeat and move on
to other acquisitions.”
Alex Dudley, a spokesman for Charter, declined to comment
on the company’s plans. A representative for Cox said the
company isn’t for sale.
Comcast Bid
Time Warner Cable last week agreed to sell itself to
Philadelphia-based Comcast in a stock deal valued at $158.82 a
share when it was announced. The offer was 20 percent higher
than Charter’s rejected bid of $132.50.
Charter is unlikely to be able to acquire the New York-
based cable operator now, said Tuna Amobi, a New York-based
equity analyst at S&P Capital IQ. Two days before the surprise
agreement with Comcast, Charter had nominated a full slate of
directors to Time Warner Cable’s board.
“It’s hard to imagine that they’re going to be pushing
ahead with the proxy battle,” Amobi said. “The case for the
superiority of Comcast’s offer was well made.”
Charter is unlikely to match Comcast’s bid and is willing
to study any assets Comcast would sell, according to a person
familiar with the matter, who asked not to be identified because
the negotiations were private. Buying Time Warner Cable will add
more than 11 million residential subscribers to Comcast’s 21
million video customers, compared with 4.3 million for Charter.
Acquiring Subscribers
The 3 million subscribers that Comcast may divest could be
worth about $17.6 billion, based on the value that the Time
Warner Cable bid placed on each subscriber, according to an
analysis from Sweeney, director of North American research at
Bloomberg Industries, and Geetha Ranganathan, a media analyst
with Bloomberg Industries. Matthew Harrigan, an analyst at
Wunderlich Securities Inc., estimates they could be valued at
$13 billion to $16 billion.
Picking up divested subscribers won’t be the end of
Charter’s dealmaking, according to Sweeney. Malone, who owns a
stake in Charter through Liberty Media, has said mergers will
help the cable industry cope with the lower video profit margins
caused by higher programming costs and fewer new customers.
“John Malone’s stated intention is to participate in
consolidation of the cable television industry,” Sweeney said
in a phone interview. “He’s going to have to do a number of
smaller deals to get to where he needs to be.”
Cox Talks
Cox held talks last year about combining with Charter,
people familiar with the discussions said in August.
Cox, which is owned by family-controlled Cox Enterprises
Inc., would be an appealing takeover target for Charter because
it has strong assets and is the next biggest target available
after Time Warner Cable, said Sweeney and Vitanza of CRT
Capital. Cox primarily provides cable services in the Southeast,
Midwest and California.
“It’s basically the only really big bite you could take,”
Vitanza said. “It’s the only one that would really allow them
to add meaningfully to their position.”
Cablevision Systems Corp., the $4.4 billion cable operator
controlled by the Dolan family, is another acquisition
candidate, said Vitanza.
Charter CEO Rutledge was chief operating officer at
Cablevision until December 2011 and “knows those assets better
than anyone else,” Vitanza said. Charter could afford to pay
$25 a share for the company, 51 percent more than its closing
price last week, he said.
New York
Malone, 72, said in October that he doesn’t see Cablevision
as an appealing target because it’s entrenched in the New York
market, giving it less room to grow.
Bright House Networks or Cequel Communications Holdings,
which operates as Suddenlink, could also draw interest from
Charter, said Frank Louthan, an Atlanta-based analyst at Raymond
James. Bright House has about 1.9 million subscribers, while
Suddenlink has 1.2 million, according to data compiled by
Bloomberg.
Mediacom Communications Corp., with about 960,000
subscribers predominantly in smaller cities and towns, is
another possibility, said Amobi of S&P.
A representative for Bethpage, New York-based Cablevision
declined to comment. Bright House, Suddenlink and Mediacom,
which are all closely held, didn’t respond to requests for
comment.
Lesser Options
Charter’s remaining options pale in comparison to Time
Warner Cable, which it had been courting for months. The Cox
family may not want to do a deal with Charter because it would
add leverage, while Cablevision’s New York assets may not be a
good fit for Charter, said Harrigan of Wunderlich.
The other smaller operators don’t have enough subscribers
to help Charter approach the size of Time Warner Cable and
Comcast, he said.
“Charter is in a situation where they can pick up some
nice systems and it’s better than Time Warner Cable remaining
intact, but it’s a far cry from becoming the sister to Comcast
in terms of the domestic business,” Harrigan said in a phone
interview.
Comcast’s bid for Time Warner Cable still validates the
need for consolidation in the cable industry, and Charter is one
of the best positioned buyers, said Sweeney of Bloomberg
Industries. After the shares more than doubled in two years,
Charter had a market value of $13.5 billion last week.
“A lot of cable companies are now probably stepping back
and saying, ‘Maybe it is time to sell,’” he said. For Charter,
“it just remains to be seen whether they can convince anybody
to sell to them.”
For Related News and Information:
Cox Said to Discuss Cable Merger With Malone-Backed Charter
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Malone Seeking Consolation Prize After Second Deal Defeat
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Marcus Secures Sweetheart Deal for Time Warner Cable: Real M&A
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Time Warner Cable deal news: TWC US <Equity> TCNI MNA <GO>
Charter deal news: CHTR US <Equity> TCNI MNA <GO>
Bloomberg Industries - Cable & Satellite: BI CATV <GO>
Real M&A columns: NI REALMNA <GO>
--With assistance from Alex Sherman and Laura Lorenzetti in New
York. Editors: Sarah Rabil, Beth Williams
To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editor responsible for this story:
Sarah Rabil at +1-212-617-5992 or
srabil@bloomberg.net