Time Warner Cable could play a little Pac-Man. One plan being discussed, being acquired by smaller rival like Charter Communications, would create a highly indebted cable giant with a value including debt of more than $100 billion.
Charter is trying to line up some $25 billion in debt to finance what could be a cash-and-stock bid. Adding that to the existing $38 billion of net debt already carried by the two companies would result in a combined entity with leverage of more than 5.5 times combined earnings before interest, taxes, depreciation and amortization. By comparison, rival Comcast’s debt multiple is closer to two times Ebitda.
Turning the tables â€" with a Time Warner gobbling up Charter â€" would require less borrowing while keeping the biggest benefits. If nothing else, according to a Breakingviews calculator, the idea could point to a higher price for Time Warner Cable.
With Charter as the seller, less debt would be needed. Shares of both companies have already surged by 42 percent - nearly triple the increase in the Standard & Poor’s 500-stock index - since March. That’s when the cable magnate John Malone bought a minority stake in Charter and kicked off rumors of consolidation.
Assume Time Warner Cable pays the going rate of about $128 for each Charter share, as of the market close on Monday. If it borrowed half of the $13.2 billion purchase price and paid the rest in shares, the combined company would wind up with debt of around four times Ebitda.
If a merged Time Warner Charter Cable could cut its total programming costs and other expenses by 5 percent, or $1.2 billion, the new company’s annual pro forma Ebitda would be about $12.5 billion. Assume the enterprise value is 7.5 times Ebitda and the combined entity’s shares could be worth nearly $148 each, after adjusting for debt and the new share count.
Right now, Time Warner Cable stock trades at around $132. The risks involved in achieving the cost savings â€" like the issue over who would run the company and Mr. Malone’s presence â€" mean that a full-blown Pac-Man defense might not be particularly tempting compared with a sale.
Even so, examining the option suggests what Time Warner Cable could achieve if it did utilize the tactic - and indicates what Charter may ultimately need to pay to buy its larger competitor.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
