Charter Communications says it is offering a full price for Time Warner Cable. At $132.50 a share, its proposal amounts to a 40 percent premium above where Time Warner Cable’s stock was trading in June, before rumors of a deal surfaced. “We think a lot of the premium is already in the stock,†Charter’s chief executive, Thomas M. Rutledge, told DealBook on Monday.
But in the news release and letter it released when announcing its offer, Charter stopped short of mentioning one key metric often used in deals analysis: the Ebitda multiple.
A company’s Ebitda â€" or earnings before interest, tax, depreciation and amortization â€" is often used to measure it against its peers, especially for debt-laden companies, and set a range for prices discussions during mergers and acquisitions.
In deal negotiations, parties often use forward Ebitda multiples to project a company’s future value. And by this measure, there is reason to think that Charter’s offer, even with its headline price of $61.3 billion, including debt, is relatively modest.
Based on Time Warner Cable’s estimated forward Ebitda of about $8.3 billion for this year, Charter’s offer represents is seven times that. That may sound like a healthy price, but it does not fare as well in light of some relevant comparisons.
Last year, when Charter paid $1.6 billion for Bresnan, a smaller cable operator, it paid a price that represents about an 8 times forward Ebitda. This suggests that Charter is willing to pay a larger premium for assets it wants.
When Time Warner Cable acquired Insight, a small rival, for $3 billion in 2011, it paid about a 8.4 times the multiple. And when Liberty Media, which is controlled by billionaire John C. Malone, made bought 17 percent of Charter last year, it did so at a price representing a multiple of about 8.6 times projected Ebitda. What’s more, Charter’s own shares are trading at a price that implies it is worth 9 times the metric.
With many deals in the cable industry getting done at multiples in this range, it is perhaps no surprise that the price at which Time Warner Cable said it would consider a sale â€" $160 a share â€" represents an 8 times multiple. Indeed, that might seem low to some shareholders and analysts.
In a presentation Charter released on Tuesday, it suggested investors use Ebitda multiples that were adjusted for the present value of tax assets. By that measure, Charter says the average multiple for deals in the cable sector is 6.5 times, and that its proposal implies a 7.3 times multiple. But that unconventional interpretation of multiples may not fly with those evaluating a deal. If Charter hopes to get a deal done, it will likely have to pay a higher price, possibly even one that reflects a multiple of at least 8 times forward Ebitda.
People watching the situation closely believe a proposal in the $140’s might be taken more seriously, and that an offer of $150 a share might even get it done. Time Warner Cable, however, says it won’t sell for below $160 a share.
Charter may also be pressured to restructure its proposal, should it modify or increase it. Time Warner Cable has said it wants a higher proportion of cash rather than Charter stock in any sale.
Mr. Rutledge on Tuesday acknowledged that Charter could finance a higher cash component for a deal. And if Charter is so bullish on the share performance of a combined company, Time Warner Cable believes, it ought to want more equity in the combined company.
Moreover, Time Warner Cable’s chief executive, Rob Marcus, on Monday proposed a symmetrical collar as part of the deal. Under that set-up, if a deal was struck and Charter’s stock went up after a deal was agreed to, Charter would have to issue fewer shares. But if its shares fall, it would have to issue more to Time Warner Cable.
If Charter believes that its low-ball bid will draw out Comcast by complicating the picture and increasing pressure on Time Warner Cable to sell, it may be mistaken. Comcast explored a joint bid for Time Warner Cable with Charter last year, according to people briefed on the matter. Under the deal considered, Comcast would have taken Time Warner Cable’s larger urban markets, while Charter would have taken the rural markets.
But Comcast opted against joining forces for at least two reasons. First, it was wary of getting involved in a complex deal, especially one involving Liberty, which is viewed by some executives and advisers as unpredictable. And Comcast also reasoned that the antitrust hurdles it would face in acquiring the big metro markets would be just as onerous as those faced in acquiring all of Time Warner Cable. If Comcast is inspired to act, it may just go after the whole company.
At this price, however, Charter is not being taken seriously by Time Warner Cable, meaning Comcast is under no immediate pressure to act.
“The Charter proposal doesn’t come close to providing our shareholders with the kind of value and protections they should expect in a transaction,†N.J. Nicholas Jr., the independent lead director of the Time Warner Cable board said on Monday. “In fact, it would transfer significant value from our shareholders to Charter shareholders, while dramatically increasing the risk profile for our shareholders.â€
