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Time Warner Cable has shareholder backing as takeover offer looms

By Alex Sherman
Bloomberg News

Time Warner Cable Inc. is loathed by many consumers and loved by many investors. It is its shareholders who might give incoming Chief Executive Officer Rob Marcus the will to reject a $62 billion offer for the company.

Even as it has lost TV customers for almost five years, the New York-based company has delivered a total return of more than 462 percent since its spinoff from Time Warner Inc. in March 2009.

Those are gains that will help persuade shareholders not to press for a sale. The returns have followed almost $7 billion in stock buybacks and net income that’s nearly doubled on the growth of the highly profitable Internet business.

That’s caught the eye of Charter Communications Inc. — and its billionaire backer John Malone — which is preparing a takeover offer of about $135 a share that could come in January, a source with knowledge of the matter said.

While Marcus, who becomes CEO next month, has said he’s willing to sell the company, Time Warner Cable wants an offer of more than $150 a share, sources with knowledge of the matter say. The company could fetch as much as $162 a share in a sale, according to Evercore Partners Inc.

“The cable business has transitioned from a pay-TV business to a broadband infrastructure business,” said Chris Marangi, a money manager at Gamco Investors Inc. “Time Warner Cable has benefited from all of those trends, and they’ve been very good at capital allocation, including reducing the size of the shares outstanding.”

Time Warner Cable’s division covering the territory of Northeast Ohio and Western Pennsylvania is based in Akron and is the company’s third-largest business unit.

Gamco manages about $45 billion and owns 400,000 Time Warner Cable shares.

Time Warner Cable’s shareholders aren’t pressing the company to engage with Charter or to run a formal sales process at this time. “We’re extremely well positioned to generate significant value and see strong growth for years to come,” wrote Bobby Amirshahi, a Time Warner Cable spokesman, in an emailed response to questions. Alex Dudley, a spokesman at Charter, declined to comment.

Analysts estimate Time Warner Cable’s net income will climb to $1.9 billion this year, up 77 percent since 2009. Time Warner Cable’s Internet subscribers are up 29 percent since its spinoff, and Internet customers might top video customers for the first time in the company’s history this quarter. Time Warner Cable had 11.6 million TV subscribers and 11.5 million broadband customers at the end of the third quarter.

The broadband data business can generate near 100 percent profit margins on new customers because the cost of connecting additional homes and offices to an existing network is low, said Craig Moffett, an analyst at Moffett
Nathanson LLC.

As earnings rose, Time Warner Cable also has cut shares outstanding by about one-fifth through buybacks. Combined with the underlying profit growth, this means earnings per share have more than doubled since the end of 2009, data compiled by Bloomberg show.

“The good about Time Warner Cable before the merger talks was, they have been financially extraordinarily well managed, and in a way that has rewarded shareholders tremendously,” Moffett said.

Time Warner Cable’s board of directors will only consider selling at a price that — including debt — is at least eight times earnings before interest, taxes, depreciation and amortization, or about $150 to $160 a share, sources with knowledge of the matter have said. They point to two recent deals in which sellers fetched that multiple.

The $162 a share sale price projected by Evercore Partners’ analyst Bryan Kraft would value Time Warner Cable at $69.6 billion including net debt.

Time Warner Cable’s shares are up about 36 percent this year amid speculation that Charter would pursue the company.

The opportunity to connect larger businesses with video, Internet and voice is the next major growth opportunity in cable, Moffett said. The chance might entice Comcast Corp. to join Charter in its pursuit of acquiring Time Warner Cable, he said.

Revenue from business services has jumped to $1.9 billion from $916 million in the last four years. Sales should double again in the next four or five years, Marcus said during the company’s third-quarter earnings conference call.

Time Warner Cable has struggled to put together a video interface that has kept pace with technology companies such as Netflix Inc. or Roku LLC.


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