Announced acquisition strategy
As rumors continue to swirl over potential buyout plans for the operationally troubled Time Warner, the company’s shareholders have benefited greatly from the resulting run-up in TWC stock. Shares of the possible acquisition target surpassed $138 on Friday, setting another 52-week high. Time Warner and its possible suitors, Charter (CHTR) and Comcast (CMCSA), belong to the iShares U.S. Consumer Services ETF (IYC), which tracks the performance of the Dow Jones U.S. Consumer Services Index.
Talk of a buyout of Time Warner began in March 2013, shortly after John Malone’s Liberty Media Corp. (LMCA) purchased a 27% stake in Charter Communications. A veteran and trailblazer of domestic cable TV, Malone was outspoken about his desire to consolidate the industry and expressed particular interest in Time Warner. Gregory Maffei, Liberty Media’s CEO, stated, “Consolidation is helpful, Time Warner Cable is appealing.”
Possible transaction details emerge
While Charter has openly and aggressively pursued Time Warner, any deal would likely be difficult to execute and fraught with risks. In particular, Charter is the much smaller company, with only about 4.2 million video subscribers compared to Time Warner’s 11.4 million. To fund such a takeover, Charter would likely have to take on substantial additional debt in order to pay TWC shareholders in cash.
This week, specific details of Charter’s possible bid began to emerge. In particular, the company is contemplating paying Time Warner shareholders a combination of up to $90 of cash per share, with the balance coming from newly issued Charter stock. There are 289 million outstanding shares of Time Warner. This means Charter would need to raise $26 billion to fund the cash portion of the merger. And indeed, this week, Charter was reported to be talking with banks to raise $25 billion in new debt. However, with Time Warner trading above $138, Charter would need to come up with additional funds to satisfy selling shareholders. If the total purchase price including a premium were to be 10% above the current share price, or roughly $152, Charter would need to issue stock to pay the remaining $62 per share, or a total of almost $18 billion of new Charter stock.
As the chart above shows, these amounts dwarf Charter’s current capitalization, which only has $14.27 billion of debt and a $13.91 billion market cap. In other words, as Market Realist discussed in the earlier series Potential consolidation for cable TV providers, this is a very aggressive transaction by Charter that will require great cooperation from financial markets to provide the necessary financing in order to complete a deal.