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After months-long game of cat-and-mouse, Charter has finally offered to buy Time Warner Cable (S TWC) in a deal valued at $62 billion, a deal that will push the cable industry toward consolidation. Time Warner of course, rejected the offer, which valued the cable provider at $132.50 per share (close to its trading value), as “grossly inadequate. The offer included approximately $83 per share in cash and $49.50 per share in Charter stock.
The real question now, is whether this letter (from Charter) pushes Time Warner Cable to the negotiating table or if it’s just another failed attempt by Charter (with the support of its largest shareholder John Malone) to set in motion a cycle of cable industry consolidation. Malone has been pushing this for a while, and so far, Time Warner has refused to bite. As we’ve said before, the cable industry is seeking consolidation to take advantage of the transition from the old-school linear style television culture to an on-demand internet-style method of getting video content.
In short it’s all about broadband and who controls that pipe into the user’s home. Because the cable companies are geographically separate in all but a few areas of the country, they compete only with the baby bells — Verizon, AT&T CenturyLink, etc. — as opposed to with each other. Thus, consolidation helps by creating a cable monopoly to go up against the telecoms providers. And in many areas, given the cable technology versus old-school DSL, the cable providers are winning. As Om said in his July post from last year:
Against such a backdrop, it makes sense that Malone & company are looking to mop up all the rivals and once again bulk up to become a mega player — one that can own a monopoly and charge you and I, whatever he wants.
This could help the cable companies negotiate TV rights, but it could also help with the implementation of broadband caps and metered pricing. The fewer cable companies there are, the more unified the rate structure might appear. So today Charter has a cap, but Time Warner Cable doesn’t. However, if Time Warner Cable gets bought by Charter (or Comcast, which is said to also be exploring a deal), both of which have caps, that unlimited broadband from TWC goes by the wayside.
With the rationale for Malone’s interest out of the way, the only big questions are how this consolidation will play out and how far regulators will let the fervor for a cable monopoly go. As for the how, Charter clearly wants Time Warner, but at least one analyst firm believes it will have to make a higher bid. From a Stifel Nicolas note on the topic:
To be sure, we have noted that TWC shares have had an M&A premium priced in for several months now; however, we do not expect TWC management, or its shareholders, to immediately accept the reported offer. Liberty Media itself has recently suggested that a merger between CHTR and TWC would result in ~$700m in annual synergies. While we don’t necessarily agree with that high an estimate, the acquisition of TWC would be of most benefit to CHTR shareholders, in our view. As such, we don’t expect TWC to accept an offer materially less than around $150/share.
So now, we’ll have to see if this public release of the letter sets off a debate over valuations in the board rooms of the cable companies, or it’s just another failed attempt to set off industry consolidation that the consumer probably doesn’t want.