June 28 (Bloomberg) -- Billionaire John Malone is exploring scenarios for how Charter Communications Inc. could acquire Time Warner Cable Inc., even after his initial overtures were rebuffed, according to people familiar with the discussions.
Malone’s Liberty Media Corp., which owns 27 percent of Charter, is working on how to structure an offer with enough cash to win over Time Warner Cable investors, said the people, who asked not to be named because the deliberations are private. Time Warner Cable isn’t interested in a deal and doesn’t think Liberty and Charter can come up with an offer that’s attractive, according to people familiar with management’s thinking.
Acquiring Time Warner Cable would be a challenge for Charter, a much-smaller company whose debt exceeds its $12.5 billion market capitalization. Time Warner Cable, valued at $31.5 billion, also would demand a hefty premium, said Bryan Kraft, an analyst at Evercore Partners Inc. in New York.
“Charter would have much more to gain from a merger than Time Warner Cable,” Kraft said in a note to clients.
Liberty Media is considering options such as borrowing against its own balance sheet or Time Warner Cable’s assets to raise the cash needed for an offer, two people said. Comcast Corp. used a similar strategy to complete its purchase of NBC Universal from General Electric Co. in 2011.
Malone said this month at Liberty Media’s shareholder meeting that he saw Charter becoming “a horizontal acquisition machine.”
“The whole name of the game in the cable business is scale,” the 72-year-old said.
Despite the resistance of Time Warner Cable, the second-largest U.S. cable company, Liberty and Charter would like to get a friendly deal done in the coming months, one person said.
In addition, Charter is considering acquiring Cablevision Systems Corp., the fifth-largest provider, two other people said. Such a deal faces its own challenges because it would require support from the Dolan family, which has controlled the company for 40 years. Kelly McAndrew, a spokeswoman for the Bethpage, New York-based company, declined to comment.
Time Warner Cable shares rose 4.4 percent to $108.22 yesterday after Bloomberg reported on the deliberations, while Cablevision climbed 5.6 percent to $16.28. Charter, located in Stamford, Connecticut, rose 4 percent to $123.81.
A purchase of Time Warner Cable would probably include a premium of at least 20 percent, one of the people said, pushing a potential transaction to $37 billion or more. Charter ranks fourth in the cable industry, and even if you include Liberty Media’s market value of $15.3 billion, the two businesses are smaller than Time Warner Cable.
Justin Venech, a spokesman for New York-based Time Warner Cable, declined to comment, as did Charter’s Alex Dudley. Heather Lipp, a Liberty Media spokeswoman, didn’t respond to a request for comment. CNBC reported earlier this month that Time Warner Cable discussed merging with Charter, pushing up the stocks of both companies.
Malone -- who has a personal net worth of $6.2 billion, according to Bloomberg Billionaires Index -- comes to the table with 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 deal in 2002.
Malone also is chairman of Liberty Global Plc, which has become the world’s largest cable operator after recent acquisitions of the U.K.’s Virgin Media Inc. and Germany’s Kabel Baden-Wuerttemberg GmbH. Liberty Global owns cable assets in 12 European countries and serves more than 25 million customers.
After buying his stake in Charter in May, Malone set out to use the holding to rebuild a U.S. cable empire. He said earlier this 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 News Corp., Walt Disney Co. and NBC Universal.
Charter is also “highly motivated” to pursue a merger with Time Warner Cable because it would allow it to increase the net present value of its net operating losses for tax-avoidance purposes, Evercore’s Kraft said. Charter has lost money every year since emerging from bankruptcy in 2009. Time Warner Cable, meanwhile, earned $2.16 billion in net income last year.
Time Warner Cable also is retooling its strategy, something it may not want Charter to disrupt, Kraft said. In a bid to focus on more profitable customers, the company is scaling back its promotions and charging more money for enhanced services such as faster broadband and multiroom digital video recorders. Time Warner Cable also is rolling out a cloud-based interface, which lets people navigate programs using an online menu.
Even so, Charter has its own management skills to offer. Tom Rutledge, Charter’s CEO, is widely considered to be the most skilled at handling operations among executives at the large cable companies, said Craig Moffett, an analyst at Moffett Research LLC in New York. Rutledge was Cablevision’s chief operating officer from 2004 to 2011.
Rob Marcus, Time Warner Cable’s COO, is expected to be the heir apparent to run the company when current CEO Glenn Britt retires at the end of the year, a person familiar with the situation said in February.
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