In a familiar turn of events, Time Warner Cable (UNKNOWN:TWC.DL) is getting hitched yet again. Will this merger actually go through as planned?
There is more at stake for Time Warner this go around, but Charter Communications (NASDAQ:CHTR) seems incredibly optimistic now that they are in the running to take over and created a formidable challenger to Comcast (NASDAQ:CMCSA). Analysts think the Charter-Time Warner deal is a slam dunk . . . but didn't they say the same thing about the Comcast deal last year? Two Fool analysts discuss all this and more on today's episode of Industry Focus.
A full transcript follows the video.
Sean O'Reilly: It's déjà vu all over again for the cable industry, on this consumer goods edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly joining you here from beautiful Alexandra, Virginia at Fool headquarters. To my left is the incomparable Vincent Shen. How are you today, sir?
Vincent Shen: I'm doing very well, Sean. I really enjoyed the long weekend. How about you?
O'Reilly: Me as well. I went to a little cookout pool party, I biked into the District. I actually biked 16 miles.
Shen: 16 miles? How you feeling after that?
O'Reilly: It hurt.
Shen: Well, at least we were able to enjoy some very nice weather.
O'Reilly: Yes we were. So, while we were out enjoying the weather, I'm sure a lot of investment bankers were very busy with the topic of the day. Which is, of course, the repeat buyout of Time Warner Cable. The deal with Comcast fell through. We were talking about it a month ago, almost to the day, and then late last week we find out -- oh, look! They're getting bought out again.
So, what's going on?
Shen: Yeah. Charter saw the rejection, essentially, of the Comcast-Time Warner deal with the regulatory issues they ran into, as an opportunity to step in.
O'Reilly: They were one of the original bidders before ...
Shen: Yes. So, early last year during that whole process when Comcast eventually came out as the winner during the -- what was essentially a bidding war -- Charter came in, their offer of $37 billion, or $132.50 per share at the time, was considered a low-ball offer, and that didn't work out for them. But this was their second chance and they're definitely...
O'Reilly: Now they're paying up.
Shen: They definitely are paying up and getting aggressive with their price.
O'Reilly: So, this deal is crazy complicated. You were saying there's four facets to it.
Shen: Well, there's two transactions happening at the same time because Charter is going to be merging with Time Warner, but it's also gobbling up Bright House Networks too, which is the sixth largest cable operator in the country. That's a $10 billion deal. So, that was announced earlier. The issue was, that was contingent on the Comcast-Time Warner deal closing.
O'Reilly: Oh, boy!
Shen: So, some people thought that might be falling through, that actually might -- Bright House might actually become a target for Time Warner if Time Warner decided to stay independent.
O'Reilly: Independent. Yeah.
Shen: To start getting aggressive in its own efforts.
O'Reilly: The word of the day is consolidation one way or another, and that's basically what we're seeing here.
Shen: Yeah. The overall trend that everybody in the industry is basically citing is that Netflix, Amazon Prime Instant Video -- all these set top boxes and other services and alternatives -- are cutting into their cable TV subscriptions.
O'Reilly: I still remember a month ago. It seems like everybody just knew something like this would happen because when the Comcast deal fell through a month ago, Time Warner Cable's stock didn't fall at all. It was negligible. Then we get this huge premium, and it's like "Oh, boy. Wish I had bought that day."
Shen: Yeah. Everybody feels like this is a huge -- there's this big change coming in where they're going to continue to lose their cable TV subscribers. So, a lot of these companies are making more investments into broadband, they're consolidating to try and cut costs, and just make things run as efficiently so they can hold a bigger piece of the pie, basically, in this industry.
O'Reilly: So, what are the possible regulatory issues? Because this thing has a huge breakup fee. That's $2 billion if this fails to go through that Charter has to pay out.
Shen: Yeah. That goes both ways too, because in one case Charter pays $2 billion if regulators block the deal -- like they blocked the Comcast deal -- and at the same time, Charters' not the only one who's been looking into snapping up Time Warner.
O'Reilly: There was another -- yeah.
Shen: There were some rumors recently from Europe, actually. From Altice, and their leader Patrick Drahi...
O'Reilly: He's been making moves.
Shen: Yeah. He recently purchased a 70% stake in a midsize company called SuddenLink which is the seventh largest cable operator in the U.S. They have about 1.5 million customers. That deal was about $9 billion, and he was in the states having meetings for that deal, but he also met with the CEO of Time Warner -- Rob Marcus -- and there were some rumors that he might be doing something similar.
O'Reilly: They're just catching up. They're just old friends catching up.
Shen: Charter picked up number six, then they decided to gobble up Time Warner as well, and Altice was looking into a very similar situation where they were snapping up number seven. Right now, that breakup fee gets paid by Time Warner if they are to end up going with a different suitor.
Based on the financials, especially for Altice, it might be too big of a deal for them.
O'Reilly: So, regulators want more competition in the cable industry. They obviously met with Comcast, Time Warner Cable, and they never had to go public with "We're not letting this go through", but they did drop the deal after multiple meetings with the regulators and it was going to look very hard.
What are the odds of this falling through because of the regulators?
Shen: The thing is, a lot of Wall Street analysts -- this news was announced just a few hours ago this morning. A lot of Wall Street analysts are already coming out saying "This is a slam dunk. This has much better odds of being approved." Keep in mind, a lot of these are the same people who, when the first deal was announced, they said that this one was most likely going to be passed. "A slam dunk, sure thing, two really big companies that -- with very..."
O'Reilly: Different geographies. That was the argument that they're going to make.
Shen: Yeah. When Comcast-Time Warner was announced they said "These guys are very influential in Congress and they should be able to get this deal passed." That obviously did not happen.
O'Reilly: Was that the argument? [...]
Shen: This time, it's the same thing. Keep in mind, this is number three and number two, and the combined entity will still be number two to Comcast. So, currently Charter has about 6 million subscribers in 25 states. The combined entity will quadruple that number to nearly 24 million subscribers.
O'Reilly: But they're still lagging Comcast.
Shen: Yes. That 24 million is second to Comcast which has about 27 million subscribers in the country. So, keeping that in mind, and also the fact that Comcast owns NBC Universal. So, it also had a lot of control of media products and properties as well. In this case, Charter and Time Warner, they don't have that issue.
So, again, that's a plus for this deal being approved. Tom Wheeler -- FCC chairman -- he had reportedly spoken to both Marcus and Rutledge recently about this deal, speaking to the leaders of the two companies saying "We're not going to bar all cable deals, but we are going to look at this and say, not only does this need to not have a negative impact on consumers, it needs to benefit them as well."
So, it's clear that they're not just going to let this fly through easily. They're going to look at it very carefully.
O'Reilly: Got it. This is kind of a homecoming for John Malone, right?
Shen: Yeah. Malone has always pushed for consolidation in this industry. Like you said, he really wanted Time Warner during that first bout of negotiations. So, being able to get it through this time, I'm sure he's very happy, but he's paying the price. The offer is about $195 per share split between cash and stock.
O'Reilly: Which raised my eyebrows when I saw it because I was like "Whoa! That's way more money than we were talking with Comcast and even with Charter originally." Why is this much more money?
Shen: Well, yeah. The premium here -- just to give you an idea -- this new purchase prices is about a 25% premium to the Comcast offer at $45 billion, and it's almost 50% premium to the original offer that Charter made last year, that it lost out on. Why that is, I think Time Warner did a really good job leveraging its situation where the Comcast deal fell through, and now it had multiple, potential suitors -- being Charter, Altice, and potentially other companies as well.
But those were the two big ones. So, maybe playing them against each other saying "We are happy to proceed, but we want to get paid for it, obviously." Plus the fact that since that first Comcast deal was announced -- the one that fell through -- Time Warner has turned around quite a bit with its operational efficiencies and its performance.
It reported earnings late last month, and it missed on top and bottom lines, but it was able to bounce back with subscriptions.
O'Reilly: So that, plus the cost cutting inherent of cleaning shop before you sell yourself?
Shen: Yeah, exactly. So, it increased its cable subscriber base for the first time since 2009. It also logged the highest number of broadband subscribers since 2007.
O'Reilly: Oh, wow.
Shen: So, combine that with what they're expecting to be -- at least $800 million in cost savings, but probably more when you factor in Bright House as well.
Shen: That's a lot of money on the table.
O'Reilly: Geez. Very good.
Shen: Total deal value, $56 billion like we said earlier. The Comcast deal was $45. Total enterprise value would include debts of almost $80 billion. This is a really big premium. The thing is, when I checked earlier for trading on Time Warner shares, I think they're still trading around $176/$177.
O'Reilly: There's a little bit of a spread there, still.
Shen: So, between the offer price -- which is $195 -- and a lot of people are weighing in the possibility that this is not going to be approved by regulators.
Shen: Which is why it hasn't jumped up to that at all -- actual offer price.
O'Reilly: Do they want a duopoly? That's -- they're probably going to put them through the ringer anyway.
Shen: Yeah, that's exactly what it's going to be because Comcast and this new entity that people are referring to as "New Charter"...
O'Reilly: It will be a very strong number two.
Shen: Yeah. They'll have 20% of the U.S. broadband market combined with Comcast; they'll be very, very sizable players. The biggest by far.
O'Reilly: Very good. Well, thanks for your thoughts, Vince. Have a good day.
Shen: Thank you, Sean.
O'Reilly: And before we go I wanted make all or our Industry Focus listeners aware of a very special offer. It is a subscription to Stock Advisor. What you'll get is two stock picks every single month from our team of analysts. It is our award winning newsletter started more than 10 years ago by Motley Fool founders Tom and David Gardner.
Just go to focus.fool.com to take advantage of this deal. Once again that is focus.fool.com. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!
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