Don't Hold Your Breath on a Charter Bid for Time Warner

Source: Wikimedia Commons. 

After The Wall Street Journal reported that a 10% drop in the share price of Comcast (NASDAQ: CMCSA  ) might undermine the company's efforts to buy Time Warner Cable (NYSE: TWC  ) and open the door for a subsequent bid by Charter Communications (NASDAQ: CHTR  ) , shares of Time Warner shot up 2% on April 2.

In the report, Shalini Ramachandran, the reporter covering the story, pointed out that since the all-stock deal between Comcast and Time Warner was announced, the value of the transaction fell 10% from $158.82 per share to $143.55. While this may give investors some incentive to buy into Time Warner's stock, Foolish investors shouldn't hold their breath on an offer any time soon.

Comcast's deal to buy Time Warner is HUGE!
At the time of Comcast and Time Warner's announcement of their merger in a transaction valuing the latter at $45.2 billion, Comcast had a $135 billion market cap and 19 million managed subscribers. If completed, the deal would create a company with over 30 million subscribers and revenue of $87 billion. On top of higher revenue and a larger customer base, the company would control over 30% of broadband customers in the U.S.

In an attempt to dissuade regulators from striking down the merger, Comcast said it was considering a scenario under which it would sell 3 million of its subscribers. Based on Time Warner's purchase price, a transaction of this size could be worth up to $17.6 billion. If successful, the company would consider increasing its already $10 billion share buyback program.

Is a Charter bid out of the question?
In light of the recent drop in share price for Time Warner, it's possible Charter has thought about pursuing the company further, but any deal between the two is unlikely to develop. Even at the company's closing price of $140.55, it's still 6% higher than the $132.50 Charter previously offered for the business. Of this, $83 per share was proposed to be in the form of cash, while the remaining $49.50 took the form of Charter shares.

Aside from the higher price Charter would have to pay, any deal greater than its last offer would probably require a significantly greater cash component to avoid the type of dilution that has created problems for Comcast. If Charter were a cash cow, this wouldn't be a concern, but with a paltry $21 million in cash and $14.2 billion in long-term debt, it would be a challenge to arrange financing for the $23.4 billion it originally would have needed, let alone any amount higher than that.

One potential solution for Charter would be to partner up with Liberty Media (NASDAQ: LMCA  ) to complete a bid for Time Warner. Including the 1.1 million Charter warrants under its control, about 26% of the company falls under Liberty Media's control. With $1.1 billion cash on hand, only $4.8 billion in debt, and free cash flow last year of $1 billion, a deal involving Liberty Media might make an acquisition of Time Warner more viable.

A drawback to this, however, is Liberty Media's decision not to pursue the purchase of SiriusXM Radio (NASDAQ: SIRI  ) any further. On Jan. 3, the company made a public announcement in which it stated that it would be willing to acquire all of the outstanding shares of SiriusXM in a stock-for-stock swap. The objective, many investors believed, would be to use the $1.1 billion (and growing) free cash flow expected to be generated by the company in 2014 to help finance the significant debt burden associated with a bid for Time Warner.

After Time Warner agreed to merge with Comcast, SiriusXM announced on March 14 that Liberty Media essentially dropped its proposal to swap its shares for the shares of its target and that, instead, it would continue to buy back $500 million worth of Liberty Media's stake in the company. More likely than not, the company's decision not to follow through with this strategic acquisition came in response to Charter's failure to snag Time Warner.

Foolish takeaway
Based on the data provided, it's possible Charter will offer to pony up the dough to buy Time Warner, but it's highly unlikely. Yes, Time Warner is cheaper than it was, but the company almost certainly cannot afford it without the help of Liberty Media. Even if Liberty Media is interested in buying the business, it would probably face a real challenge going back to SiriusXM's shareholders and making the same kind of offer it did earlier this year. All of these factors point toward a scenario where Charter might be able to arrange a deal, but the odds are so stacked against it that investors shouldn't hold their breath.

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