Are you a long-term Time Warner Cable (UNKNOWN:TWC.DL) shareholder? It may be a little premature, but eventually, you may want to write a letter of thanks to the Federal Communications Commission. Because it appears the FCC -- and its chairman, Tom Wheeler -- may have unintentionally added as much value to your investment as Time Warner Cable's CEO Rob Marcus.
If you remember, the hyped Comcast-Time Warner Cable merger was denied by the FCC -- or at least the conditions imposed by the federal body were so onerous that it no longer made sense to Comcast. As a result of the abandoned bid, CEO Rob Marcus lost out on his $80 million "termination fee" and many shareholders were expecting the takeover premium baked into Time Warner Cable shares to eventually dissipate.
Instead, the exact opposite happened: The mere fact that the company was open to being acquired attracted numerous interested parties, including European telecom company Altice and midsize cable operator Charter Communications (NASDAQ:CHTR). This week, Charter confirmed that it is offering $195.71 per share for Time Warner Cable: a 22% premium to Comcast's offer.
Did CEO Rob Marcus not properly market his company?
This new offer is subject to shareholder approval from Time Warner Cable's investors, of course, but considering the Comcast offer was approved, this should not be a problem.
The question is why wasn't this offer ferreted out prior to accepting Comcast's bid? On background, Charter originally made an offer for the company last year at roughly $37.3 billion -- which was turned down by Time Warner Cable in favor of Comcast's $45.2 billion offer. At the time of Charter's original bid, Time Warner Cable was asking for the equivalent to $160 per share, a figure now considered low.
Charter is now offering a huge premium to Comcast's offer, raising its bid by 47.5% in the process. European telecom company Altice also reportedly expressed a semblance of interest.
This huge premium doesn't appear to be operationally or financially driven. In Q1, Time Warner Cable grew revenue by 3.5% year over year, with a 1.2% increase in residential customer relationships. This isn't enough growth to justify the massive increase in its takeover price.
Mergers and acquisitions are a delicate dance akin to corporate courtship. If you seem too eager, acquirers could lower their offers -- but if you don't properly market your company effectively, the company could be sold for less than its full value.
The fact that Charter came back and raised its final offer to $55 billion, even after Comcast withdrew its bid, suggests that Time Warner Cable may not have appropriately marketed its value or evaluated its offers fully before accepting the Comcast offer.
It would be prudent to note that some analysts actually praised Time Warner Cable for its recent moves. Industry analyst Craig Moffett from MoffettNathanson offered kudos to Time Warner Cable's management for recently playing Altice and Time Warner Cable off of each other and mentions the large premium as a big win for management. However, the comment ignores the fact that Marcus had previously accepted the lower offer from Comcast. The end result is a reductive, "all's well that ends well" summation -- ignoring the fact that Time Warner Cable received a massive "taksies backsies" courtesy of the FCC.
Let's hold off on writing that thank you note
Before you sit down to write Chairman Wheeler a nice thank-you card, remember that "what the federal government giveth, the federal government can also taketh away." After seemingly enriching Time Warner Cable shareholders by denying Comcast's apparent lowball offer, the FCC also has the potential to block the Charter-Time Warner Cable merger as well. And that's because the FCC gets the final say on this offer too.
After decades of facing allegations that the entity was a "revolving-door" for corporate lobbyists, including Wheeler himself, the FCC has taken a pro-consumer focus under this commissioner's watch. In addition to the Comcast-Time Warner Cable decision, the FCC took what was considered a pro-consumer stance on Net Neutrality -- even bringing up broadband market power as a reason for the Comcast-Time Warner ruling.
And while there's no guarantee this merger will be approved, it appears to have a better chance than the Comcast merger. The combined entity will have roughly 23 million customers, whereas Comcast alone has 27.2 million. According to MoffettNathanson, the Charter merger would command more than 20% market share in the high-speed broadband market, while the Comcast deal would have given the combined company 40% market share.
But if this merger goes through, you can thank Tom Wheeler just as much as CEO Rob Marcus for the added 22% gain. Maybe Wheeler should get an $80 million bonus, too.