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We've known for a while now that Charter Communications (CHTR 0.02%) wants to buy its larger rival, Time Warner Cable (NYSE: TWC). But that deal hasn't seemed likely, especially since Charter has about half the subscriber base and only half the market capitalization of its target. Comcast (CMCSA 0.01%) could complicate things, too, as it is apparently interested in buying all, or even just a part, of Time Warner Cable. In the pool of potential suitors, Charter is far from the biggest fish.
Plus, Time Warner's shares are up big already this year -- by 42%, to be exact. Any purchase offer would probably need to come at a premium to that steep price if Charter is going to have a shot at getting enough of Time Warner's shareholders on board. Even with the backing of Liberty Media, which owns a big stake in Charter, it's hard to see exactly how the cable operator could pull a deal like that off.
But maybe a huge chunk of cash would do the trick. According to The Wall Street Journal, Charter is putting together an offer that would include as much as $90 a share -- in cash -- for Time Warner Cable's shareholders. The rest of the deal would reportedly be funded through Charter's stock, with the tab coming to about $25 billion in new debt for the company .
At roughly two-thirds of Time Warner's current stock price, that mound of treasure could make the deal very attractive to its current investors. Remember, it was just a few months ago, in mid-April, that Time Warner shares were trading at that $90 price. Shares hit a 2013 low of $85 just before that, in late February. And the company isn't exactly shooting the lights out with its earnings results lately: Revenue ticked higher by just 2.9% last quarter as it lost 300,000 video subscribers.
Of course, major risks remain to a deal between between Charter and Time Warner. Take financing, for example. Charter is already carrying $14 billion in debt. Add another potential $25 billion for this deal, plus the assumption of all of Time Warner's liabilities, and you're looking at one highly leveraged cable operator. Bigger companies like Comcast just wouldn't have the same issues in putting together a merger of this size. On the other hand, Charter might benefit from its smaller size here, as a combined company could be small enough to reduce the regulatory hurdles that would come from a merger between, say, the top two cable companies in America.
Still, with programing costs spiking, consolidation in the industry makes sense. And Charter's bid looks a bit less outrageous now, as the package it's putting together is substantial. With the help of a mound of cash, the nation's fourth-largest cable operator might just succeed at purchasing the nation's second-largest one.