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Charter's Low Ball Is Just the Beginning

By Michael Lewis – Jan 15, 2014 at 3:00PM

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A price of $132.50 for Time Warner Cable is insulting to its management team, but shareholders may be more aware of the benefits of coming under the wing of John Malone.

Everyone knew that Charter Communications (CHTR 1.64%), backed by the full faith and credit of John Malone and Liberty Media (FWONA), would make a bid for much larger cable rival Time Warner Cable (NYSE: TWC). Malone had said as much throughout the second half of 2013. What many did not expect, though, was the level of hardball that the suitor would bring to the table. Charter offered no premium to Time Warner Cable shareholders, and the message to the public was that TWC management had failed in its quest. If you thought this was to be an amicable takeover, you thought wrong.

Playing nice
Charter had a big task ahead of it when determining just how to go about making an offer for the much larger Time Warner Cable. For one thing, Time Warner Cable shareholders have actually had a great run during the past 12 months -- the stock is up nearly 40%. TWC video subscribers have declined, and the company alienates its customers with every content battle and blackout period, but broadband revenue continues to grow along with value-added services such as home automation.

One would think that Charter would have offered some form of premium for Time Warner Cable's performance, but it offered $132.50 per share. That's about $2.50 less than today's share price.

If the zero-premium offer wasn't audacious enough, Charter certainly went there with a public statement saying that Time Warner Cable management "failed." The company cited the fact that TWC subscribers have the lowest satisfaction rating in the industry, and said that the company had negative momentum.

The term negative momentum, while true, is more indicative of an entire industry (Charter included) than just Time Warner.

So, naturally, Time Warner Cable promptly rejected the offer, calling it "grossly inadequate." Was this the right way to approach a massive cable consolidation deal?

Opening salvo
In John Malone's secret underground lair, where he determines the future of the cable industry and weather patterns, this was not an ill-thought move, to be sure. If there's one thing that Malone is reliably masterful at, it's jockeying for position.

While the Charter stock part of the purchase is tax-advantageous, the company could boost its cash offer to make the deal more appealing, and without breaking the bank.

Perhaps, more importantly, savvy Time Warner Cable shareholders may see the value in owning 45% of the would-be entity that is Charter/Liberty Media/Time Warner Cable. Malone-controlled Liberty Media is working fast to change the cable landscape. Liberty Media is already a quarter-owner of Charter. Obviously, these connected parties would all be laying the groundwork for Malone's vision of a consolidated cable industry with tremendous pricing power over content owners, and have a real shot at competing against Internet streaming. Regardless of Time Warner Cable's value today, this is what Charter is offering shareholders.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Liberty Media. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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