Charter Communications, which has been talking about acquiring Time Warner Cable since the middle of last year, on Monday sent a letter to TWC's CEO proposing that the two companies engage in merger talks.
In the letter, released by Charter, CEO Tom Rutledge says that at a meeting with his TWC counterpart, Rob Marcus, Charter indicated it was willing to offer a deal worth more than $130 a share, including about $83 in cash.
Time Warner Cable's response was "a verbal offer at an unrealistic price," according to Rutledge.
Time Warner Cable said its board unanimously rejected "a third grossly inadequate proposal" from Charter Communication to acquire the company. But it said it is open to a transaction with Charter at $160 a share, including $100 in cash, which it said represented a multiple of 8 times forward earnings.
TWC said the proposal wasn't completely spelled out in the letter it received from Charter, but it quoted reports that the most recent offer was worth $132.50. A June offer was worth $114 and an October offer was worth $127, TW Cable said.
"Charter's latest proposal is a non-starter. First and foremost, it substantially undervalues TWC," Rob Marcus, TWC's CEO said in a statement.
"Not only is the nominal valuation far too low, but because a significant portion of the purchase price would be in Charter stock, the actual value delivered to TWC shareholders could be substantially lower give the valuation, operation, and significant balance sheet risks embedded in Charter’s stock," he said. "We gave Charter our bottom line, but rather than pursuing this path, Charter has chosen to go public with its third low-ball offer trying to pressure TWC's Board into selling the Company at a grossly inadequate price."
TWC stock closed at $132.40 a share, down 96 cents. Charter closed at $134.22, down $2.20. Charter contends that TWC stock has run up about 45% already because of Charter's interest acquiring it.
John Malone, chairman of Liberty Media and controlling shareholder of Charter, has been touting the desirability of a more consolidated cable industry, partly as a way to gain leverage in negotiation with programmers over costs.
In his letter, Rutledge said, "I believe we have a significant opportunity to put our companies together in a way that will create maximum, long-term value for shareholders and employees of both companies. Our financing plan, which gives us the ability to deleverage during a period where our operating plan has sufficient time to be implemented, is prudent. Our history of operating performance is well understood, as are our tax assets."
"While we are preserving all options going forward, we remain open to real engagement. We would like to engage with you to conclude an agreement for a business combination that is beneficial for your shareholders and ours," Rutledge said.
Here is the complete text of Charter's letter to TWC:
I enjoyed spending time with you in December discussing our prior proposals and the challenges our industry faces. As you know, I believe we have a significant opportunity to put our companies together in a way that will create maximum, long-term value for shareholders and employees of both companies. Our financing plan, which gives us the ability to deleverage during a period where our operating plan has sufficient time to be implemented, is prudent. Our history of operating performance is well understood, as are our tax assets.
As you know, Time Warner Cable quickly rejected our proposals in June and October, and refused to engage until we met in December. I communicated a willingness to submit a revised proposal in the low $130s, including a cash component of approximately $83. Following our meeting, you agreed to have our CFOs meet to review the structure, financing, tax and cash flow aspects of a transaction, which we understand was very helpful for Time Warner Cable. We believed Time Warner Cable and its Board of Directors would recognize the significant value of this combination and genuinely engage. Instead, you came back with a verbal offer at an unrealistic price expectation which ignores a full 39% premium already reflected in Time Warner Cable's stock (as of last Friday), widespread shareholder endorsement of a deal, and Time Warner Cable shareholders' approximately 45% ownership in the upside of the proposed transaction. Furthermore, your proposal to significantly increase the cash component of the price contradicts Time Warner Cable's own public statements on debt leverage. The information provided to date has been exclusively one-way, which further reinforces the point that there is no genuine interest from Time Warner Cable management and Board of Directors to engage on this opportunity.
While we are preserving all options going forward, we remain open to real engagement. We would like to engage with you to conclude an agreement for a business combination that is beneficial for your shareholders and ours. We would be prepared to offer a cash/stock election mechanism that would allow those shareholders who wish to participate in the benefits of a combination to do so, while others who wish to cash out will be able to do so at a meaningful premium. The financing to complete this transaction is fully negotiated, and we can be in a position to sign commitment letters in a matter of days.
This transaction is beneficial to Time Warner Cable shareholders who remain invested in the combined company because they realize the value creation from cost reductions, faster organic growth, and leveraged and tax advantaged returns. We also believe that the new combined company, through potential future swaps and divestitures with other industry participants, can help rationalize the geographic holdings of the industry into more efficient entities capable of providing better services and products into a very competitive marketplace, thus generating higher returns for the combined company and the industry at large.
We are fully prepared to finalize a deal on an extremely expedited basis. We believe that time is of the essence to prepare our companies to meet the challenges of the industry, which is why we have decided to announce the status of our discussions to date to both sets of shareholders.
With best regards,
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Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.
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