Charter Communications Inc. (CHTR), backed by billionaire John Malone, is working with Goldman Sachs Group Inc. to pursue a bid for Time Warner Cable Inc. (TWC), according to people with knowledge of the situation.
The move signals that Malone and Charter Chief Executive Officer Tom Rutledge are serious about revisiting a potential merger after being rebuffed by Time Warner Cable earlier this year, said one of the people, who asked not to be identified because the matter is private.
Time Warner Cable rejected an informal approach at the end of May because Charter -- a smaller company -- didn’t offer a premium, people familiar with the situation said last month. Malone, who owns 27 percent of Charter, is scouting potential acquisitions in an effort to turn the Stamford, Connecticut-based cable company into “a horizontal acquisition machine.”
“Malone has clearly thrown down the gauntlet,” said Paul Sweeney, an analyst at Bloomberg Industries. “He believes the cable industry needs further consolidation.”
Charter rose 3 percent to $128.31 at the close in New York. The shares have climbed 68 percent this year. Time Warner Cable, up 20 percent in 2013, rose 2.3 percent to $116.47.
Malone’s holding company, Liberty Media Corp. (LMCA), is considering a range of options for financing a merger, people familiar with the deliberations said last month.
“The whole name of the game in the cable business is scale,” Malone, 72, said in June at Liberty’s investor meeting.
Acquiring Time Warner Cable would be a challenge for Charter because of its smaller size and existing debt. Charter has a market value of $12.6 billion, compared with $33.1 billion for Time Warner Cable.
Malone -- who has a personal net worth of $6.8 billion, according to Bloomberg Billionaires Index -- has decades of experience negotiating cable deals in the U.S. and Europe. He built Tele-Communications Inc. in the 1970s and 1980s into one of the largest pay-TV companies before selling it to AT&T Corp. in 1999. That company later became part of Comcast after a $58.7 billion transaction in 2002.
After buying his stake in Charter in May, Malone set out to use the business to rebuild a U.S. cable empire. He said last month he was interested in both large and small cable acquisitions to give Charter more scale in negotiating programming contracts with content providers such as Walt Disney Co. and Comcast Corp. (CMCSA)’s NBCUniversal.
“If he is looking for a transformative transaction, then Time Warner Cable would certainly fit the bill,” Sweeney said.
Malone’s acquisition plan could add $20 billion to Time Warner Cable’s outstanding obligations of $24.8 billion, increasing debt to earnings before interest, taxes, depreciation and amortization to 5.4 times, according to Moody’s Investors Service. That’s in line with a speculative-grade rating in the Ba category, at least two levels below Moody’s current Baa2 ranking.
Time Warner Cable bond prices have tumbled since Bloomberg News reported June 27 that Malone was mulling an acquisition. The bonds are the worst performer in the Bank of America Merrill Lynch U.S. Media Index since that date, dropping 3.58 percent through yesterday. The potential sale may subordinate unsecured creditors and cut the company’s ratings to junk from its BBB ranking from Standard & Poor’s.
The company’s $1.5 billion of 5 percent notes due February 2020 fell 3 cents to 99.9 cents on the dollar after trading as high as 111.4 cents last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.