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Time Warner Cable Has Shareholder Backing as Takeover Looms

Monday, 23 December 2013 11:30 AM

Time Warner Cable Inc. is loathed by many consumers and loved by many investors. It’s shareholders who may give incoming Chief Executive Officer Rob Marcus the will to reject a $62 billion offer for the company.

Even as it has lost TV customers for almost five years, the New York-based company has delivered a total return of more than 462 percent since its spinoff from Time Warner Inc. in March 2009, gains that will help convince shareholders not to press for a sale. The returns have followed almost $7 billion in stock buybacks and net income that’s nearly doubled on the growth of the highly profitable Internet business.

That’s caught the eye of Charter Communications Inc., and its billionaire backer John Malone, which is preparing a takeover offer of about $135 a share that could come early next year, a person with knowledge of the matter said. While Marcus, who becomes CEO next month, has said he’s willing to sell the company, Time Warner Cable wants an offer of more than $150 a share, people with knowledge of the matter say. The company could fetch as much as $162 a share in a sale, according to Evercore Partners Inc.

“The cable business has transitioned from a pay-TV business to a broadband infrastructure business,” Chris Marangi, a money manager at Gamco Investors Inc., said in a phone interview. “Time Warner Cable has benefited from all of those trends, and they’ve been very good at capital allocation, including reducing the size of the shares outstanding.”

No Pressure

Rye, New York-based Gamco manages about $45 billion and owns 400,000 Time Warner Cable shares. The stock gained 0.25 percent to $132.78 as of 10:32 a.m. in New York today.

Time Warner Cable’s shareholders aren’t pressing the company to engage with Charter or to run a formal sales process at this time, another person said, asking not to be identified because the information is private.

“We’re extremely well positioned to generate significant value and see strong growth for years to come,” Bobby Amirshahi, a Time Warner Cable spokesman, wrote in an e-mailed response to questions. Alex Dudley, a spokesman at Charter, declined to comment.

Analysts estimate Time Warner Cable’s net income will climb to $1.9 billion this year, up 77 percent since 2009. Time Warner Cable’s Internet subscribers are up 29 percent since its spinoff, and Internet customers may top video customers for the first time in the company’s history this quarter. Time Warner Cable had 11.6 million TV subscribers and 11.5 million broadband customers at the end of the third quarter.

Fat Profits

The broadband data business can generate near 100 percent profit margins on new customers because the cost of connecting additional homes and offices to an existing network is low, said Craig Moffett, an analyst at MoffettNathanson LLC.

As earnings rose, Time Warner Cable also has cut shares outstanding by about one-fifth through buybacks. Combined with the underlying profit growth this means earnings per share have more than doubled since the end of 2009, data compiled by Bloomberg show.

“The good about Time Warner Cable before the merger talks was, they have been financially extraordinarily well managed, and in a way that has rewarded shareholders tremendously,” Moffett said.

Board’s Intentions

Time Warner Cable’s board of directors will only consider selling at a price that, including debt, is at least 8 times earnings before interest, taxes, depreciation and amortization, or about $150 to $160 a share, people with knowledge of the matter have said, pointing to two recent deals in which sellers fetched that multiple.

“Time Warner Cable is in a very strong bargaining position,” said Paul Sweeney, an analyst at Bloomberg Industries. “There is no reason for them to accept anything less than exactly what they want.”

When Charter agreed to pay $1.63 billion for Cablevision Systems Corp.’s Optimum West, a regional provider once called Bresnan Broadband Holdings LLC, it paid about 8 times expected Ebitda, data from Bloomberg Industries show. In its $3 billion purchase of Insight Communications Co., announced in 2011, Time Warner Cable paid about 8.6 times Ebitda, the data show.

The $162 a share sale price projected by Evercore Partners’ analyst Bryan Kraft would value Time Warner Cable at $69.6 billion including net debt, or about 8.4 times the average estimate for 2014 Ebitda of $8.24 billion.

Time Warner Cable’s shares are up about 36 percent this year amid speculation that Charter would pursue the company. A group of lenders has agreed to lend Charter as much as $25 billion for the bid, which will also include Charter stock, people have said. Malone’s Liberty Media Corp. is Charter’s largest shareholder.

Business Opportunity

The opportunity to connect larger businesses with video, Internet and voice is the next major growth opportunity in cable, Moffett said. The chance may entice Comcast Corp. to join Charter in its pursuit of acquiring Time Warner Cable, he said.

Revenue from business services has jumped to $1.9 billion from $916 million in the last four years. Sales should double again in the next four or five years, Marcus, the incoming CEO said during the company’s third-quarter earnings conference call.

“Comcast already has Boston, Philadelphia and Washington, and with New York, you would have a contiguous run of the major business centers along the East Coast,” Moffett said.

While Comcast and Charter have discussed a joint bid for Time Warner Cable, Charter is preparing its offer letter to acquire all of the company without Comcast’s involvement, people said. Comcast spokesman John Demming declined to comment.

Customer Dissatisfaction

Time Warner Cable has the lowest customer satisfaction score among all pay-TV operators and the second-lowest score among all companies ranked in the American Customer Satisfaction Index for 2013, behind only the Long Island Power Authority.

That’s translated to 18 consecutive quarters of TV customer defections. The company has lost more TV subscribers in the past two years than Comcast despite having almost 10 million fewer.

Marcus has acknowledged that efforts to boost revenue per customer by charging more for specific services, such as digital video recorders, led to more disconnects than anticipated. Time Warner Cable lost 304,000 video subscribers last quarter, the largest quarterly decline in TV customers ever recorded by a U.S. cable company, according to data compiled by Bloomberg.

“I’m still not satisfied with the subscriber results being generated by our current programs,” Marcus said in October.

Better Management

The provider also lost broadband subscribers in the quarter for the first time in the company’s history, evidence it wasn’t offering customers a compelling reason to keep its Internet product if they were also disconnecting TV. Time Warner Cable lost 9,000 broadband customers in the quarter. Competitor Verizon Communications Inc.’s FiOS added 173,000.

Time Warner Cable also has struggled to put together a video interface that has kept pace with technology companies such as Netflix Inc. or Roku LLC. Instead, Marcus and outgoing CEO Glenn Britt have allowed other companies to create the navigation experience for Time Warner Cable customers.

“As long as people subscribe to our video service, I don’t care if they use a Roku interface or an Xbox or whatever,” Britt said in June.

This lack of imagination is where Charter CEO Tom Rutledge may make his biggest impact, if given the chance to run a larger company, Shahid Khan, chairman of MediaMorph Inc., said in an interview. Rutledge would run a combined company, and Marcus said he would be willing to step aside if he can maximize shareholder value in a deal.

“Tom leads the best management team in the industry,” said Khan, who worked with Rutledge as a consultant for Cablevision Systems Corp. from 2008 to 2012. Rutledge was Cablevision’s chief operating officer at the time. “The rest of the industry follows him.”

Malone’s Urge

Rutledge spearheaded the cable industry’s push toward adding Wi-Fi hotspots in major cities and updated Cablevision’s hardware and software, allowing the company to roll out new products at a faster pace than peers, Khan said.

Ultimately, the strength of Time Warner Cable’s other businesses, as well as the potential upside of broadband and business services, is what’s really encouraging Malone’s urge to consolidate, said Marangi.

“The difference in fundamental performance in any of the cable companies is not all that large,” Marangi said. “It goes in cycles and varies by competitive markets. Time Warner Cable is not a broken business.”

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Time Warner Cable Inc. is loathed by many consumers and loved by many investors. It's shareholders who may give incoming Chief Executive Officer Rob Marcus the will to reject a $62 billion offer for the company.
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Monday, 23 December 2013 11:30 AM
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