That long proxy fight to take control of Time Warner Cable that I predicted earlier this week? It lasted days, ending with the announcement on Thursday that Comcast would acquire Time Warner Cable. The questions now are whether Time Warner Cable can complete the deal, and what lesson we’ve learned for future hostile takeovers.
Time Warner Cable appears to have put an end to Charter Communications’ bid by pulling the proverbial rabbit out of the hat â€" a competing offer from Comcast. (In my defense, I did say that this was one way Time Warner Cable could avoid a proxy contest.) Time Warner Cable promptly accepted the offer of 2.875 Comcast shares for each Time Warner Cable share. The offer was valued at $158.82 a share, given Time Warner Cable’s closing price on Wednesday.
If a buyer’s stock goes up, it is usually because the market perceives that value is being created. Down means the opposite. This is not always right - after all, investors are pretty often wrong.
The market reaction in this case appears to signal that Comcast may have overpaid. Right now, Comcast’s shares are trading down more than 3 percent, valuing its offer at roughly $154 per Time Warner Cable share. This is about $4 billion in Comcast’s market value, and is a rough approximation of what the market, at least, views as the size of the overpayment.
Time Warner Cable has not filed the merger agreement, so we don’t know the full details. But it does not appear that there is a collar that protects Time Warner Cable’s shareholders if Comcast’s stock price goes down. Instead, the ratio is fixed, and so until this deal is completed, Time Warner Cable’s stock will trade on Comcast’s share price.
Still, Time Warner Cable’s stock is trading at only about $144 a share, about 6.5 percent below Comcast’s offer price. This spread is probably a symptom of two things. First, the deal will take about a year to clear regulatory approvals and close. Second, the regulators â€" namely the Federal Communication Commission and antitrust lawyers in the Justice Department â€" may balk.
While Comcast and Time Warner Cable have proclaimed that they have no overlap and see few antitrust problems, these issues are always tricky in industries with only a few big players. Just ask AT&T, which ended up paying a breakup fee of roughly $4 billion in its failed bid to acquire T-Mobile. So while the wait is probably the main factor driving the spread, investors are no doubt cautious about the regulatory approval process.
This may also explain why there is no breakup fee payable by either of the parties. That there is no fee is not unique. As Michael J. de la Merced noted on Thursday on DealBook, there was no breakup fee in the Citicorp-Travelers Group merger in 1998, for example. Time Warner Cable may have taken the position that the market should simply decide, which Comcast accepted because it believed that Charter will not match its price.
But not having a breakup fee also works to Comcast’s advantage if regulators block the deal. It can walk away. The alternative would have been that Comcast would have been obligated to pay a breakup fee of about $1.3 billion, if it were the standard 3 percent of deal value.
So while the risk of regulatory intervention appears low, there were enough reasons on both sides to forgo a break fee.
As for deal making in general, the sale outcome was driven by the defense that Time Warner Cable put forth. By putting a per-share figure out there in rejecting Charter’s lower bid of $132.50 a share, Time Warner Cable’s board hoped to drive Charter away.
But by doing so, Time Warner Cable acknowledged that it was up for sale. Kudos to Time Warner Cable’s four investment bankers at Morgan Stanley, Allen & Company, Citigroup and Centerview Partners for finding a better offer.
But this defense could just as easily have not worked, It could instead have pushed Time Warner Cable into a position it could not negotiate from, instead leaving the decision up to shareholders.
That’s why this type of defense should be used judiciously. It really is only for boards that think they can make the case, convincingly and with little argument, that an offer is undervalued or if there is another real buyer. If the board is not confident in either, it risks spending a lot of time and money only to lose, since shareholders these days are more inclined to go against directors on these matters.
Then again, we don’t see many hostile bids these days anyway. That Charter has bid and lost shows why. Such bids involve a huge expenditure of resources and effort for an uncertain outcome. No doubt, this deal is going to underline that point.
