Charter’s Time Warner Cable Bundle is No Bargain
Charter finally got the cable consolidation it was seeking with deals to buy Time Warner Cable and Bright House. But it had to pay up to get them.
If you thought your cable bill was expensive, just take a look at what John Malone is paying.
The Liberty Broadband chairman’s vision of spearheading cable consolidation through his company’s investment in Charter Communications may finally be coming to fruition. Charter said Tuesday it would buy Time Warner Cable for $195.71 a share in cash and stock.
The expectation that Charter would swoop in after regulatory concerns caused Comcast to abandon its own deal to buy Time Warner Cable meant the latter’s stock price already reflected bid speculation.
Yet Charter’s bid represents a 14% premium to Friday’s closing price, valuing Time Warner Cable at $78.7 billion, including debt. That equates to nearly nine times 2016 earnings before interest, taxes, depreciation and amortization. Charter also said it was buying closely held Bright House Networks for $10.4 billion. Charter’s own market capitalization is about $20 billion.
Charter’s decision to pay up owes something to the fact that shareholders have bid up its own shares, largely in anticipation of a deal. Meanwhile, Amsterdam-listed Altice emerged last week as a potential rival bidder for Time Warner Cable. Altice, which said May 20 it had agreed to buy a 70% stake in Suddenlink, aims to eventually get 50% of its revenue from the U.S. Time Warner Cable would have been the quickest route to that.
Charter’s offer likely puts Time Warner Cable out of reach for Altice. But the high price tag also makes the deal riskier.
Charter should benefit when it comes to purchasing programming from media companies. Costs for each of its own subscribers and those of Bright House should fall toward the lower rates paid by Time Warner Cable.
Still, even factoring in the $800 million in annual synergies Charter says it can achieve, it is paying 8.3 times Ebitda for Time Warner Cable, according to MoffettNathanson. That is 26% higher than the company’s five-year average.
Indeed, excitement about consolidation has pushed up prices across the board for cable assets. Beyond the two Charter deals, Altice’s Suddenlink deal valued that company at nearly 10 times 2014 Ebitda. Even Cablevision, which is for sale but has yet to find a buyer, trades at 8.3 times next year’s Ebitda.
Those multiples ignore the sector’s structural challenges. These include the rise of video delivered directly to consumers via the Internet and the heightened regulatory oversight of broadband through the government’s new net neutrality rules.
Granted, Time Warner Cable has improved its results somewhat of late, adding video subscribers in the first quarter for the first time since the first quarter of 2009. After the deal, Charter may be able to wring some value from a deeper push into selling to corporate customers or an entrance into Wi-Fi enabled wireless services. The combined company also has the backing of longtime cable owners, including Liberty and Bright House owner Advance/Newhouse. Liberty and Advance/Newhouse will own between 19% and 20% and between 13% and 14%, respectively, of the new company.
But the last time cable companies traded at these levels, Ebitda was growing at double-digit rates as consumers upgraded to high-speed broadband. With this trend largely played out, the runway to growth is now far less clear: Time Warner Cable’s Ebitda, for example, rose by just 3.1% in 2014.
For Charter, consolidation may have come at too steep a cost.