Digging Deeper Into Time Warner’s Rejection of Charter’s $37.8B Offer

Charter CEO appeals to TWC shareholders. Might Comcast try next?

Charter's most recent offer for Time Warner Cable has earned jeers from TWC brass. The potential cable conglomerate merger would have cost Charter some $37.8 billion, but Time Warner rejected the offer out of hand, with newly minted CEO Rob Marcus calling it a "low-ball offer" in an interview and saying that Charter "want to steal the company." Meanwhile, Charter CEO Tom Rutledge took his pitch directly to TWC investors, asking them to "get involved"—not exactly a selfless strategy since a buyout would undoubtedly goose the share price.

But industry insiders say that the cable provider is on the block, and it's only a matter of time before it (and other, smaller cable providers, as well) end up consolidating to save money on internal resources and drive a harder bargain with the networks. This is the third proposal from Charter so far; TWC's counter was for $45.7 billion, a number Rutledge called "unserious." John Malone, of Liberty Media, is backing the Charter offer.

The deal would be for approximately seven times Time Warner's adjusted revenue; below prior transactions in the sector but not unreasonable taking into account Time Warner's problems with its customer base and the entrenched bureaucracy that any buyer would have to metabolize, presumably over years. Time Warner, Rutledge said to CNBC, "in the last two years has lost the equivalent of a Los Angeles in subscriber losses."

Reading between the lines, it seems that the offer hinges most on the amount of Charter stock offered as part of the deal—including debt, the effective price of the Charter offer rises to some $61.3 billion; TWC wants more cash. "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 given the valuation, operational, and significant balance sheet risks embedded in Charter's stock," the company said.

The elephant in the room, of course, is Comcast, the cable industry giant that bought NBCUniversal and is rumored to have its eye on Time Warner. That company, though, is now big enough that the purchase of Time Warner—which would make Comcast's contiguous footprint across the Northeast frankly gigantic—is being scrutinized closely by watchdogs despite the fact that no formal offer has been made. 

But in 2009, regulators vacated the cap on cable company size, so the barriers to such a merger might not be as serious as some have said. Still, time will tell, and it may come down to the individual regulators when all is said and done. “The fact that there’s not a cap does not end the analysis,” Gene Kimmelman, former chief counsel for competition policy at the DOJ, told Bloomberg.