TW Telecom Seen Luring Time Warner Cable: Real M&A

Potential acquirers who agree with Corvex Management LP that TW Telecom Inc. is an attractive takeover candidate would have to pay one of the industry’s highest valuations to get a deal done.

TW Telecom rallied 5.8 percent to an 11-year high on May 8 after Corvex, an investment firm that bought an almost 6 percent stake, said Level 3 Communications Inc. would be a logical suitor for the phone and Internet services provider. D.A. Davidson Co. said Time Warner Cable Inc. and Comcast Corp. could make more sense as buyers of TW Telecom, while shareholder Thrivent Financial for Lutherans said the company would fill a hole for telecommunications provider CenturyLink Inc.

TW Telecom already has the highest enterprise value relative to free cash flow among U.S. telecom carriers valued at more than $1 billion, according to data compiled by Bloomberg. An acquirer would need to offer more than a 20 percent premium for the $4.3 billion company, Raymond James Financial Inc. said. As cable providers hunt for new growth opportunities, gaining access to Littleton, Colorado-based TW Telecom’s fiber network and expertise in providing telecom services to businesses may be worth the price, Cowen Group Inc. said.

“Logically, strategically, fundamentally, it makes sense that at some point TW Telecom will be acquired,” Colby Synesael, a New York-based analyst at Cowen, said in a telephone interview. “The importance of having an asset like TW Telecom within your company is going to become increasingly important, and, at some point, that makes the valuation argument a little bit easier to overcome.”

Joint Venture

Created two decades ago as a joint venture of U.S. West and Time Warner Inc., TW Telecom went public in 1999 under the name Time Warner Telecom Inc. The company provides data networking, voice and other telecom services to corporate and government customers in 75 U.S. metropolitan markets, according to TW Telecom’s latest annual report.

TW Telecom would be an attractive acquisition target and offers “massive value” in that context, Keith Meister, founder and managing partner of New York-based Corvex, said last week at a conference. Level 3, which Corvex owned a stake in as of Dec. 31, would be a good suitor for the company, Meister said.

TW Telecom “has demonstrated a long history of open dialog with investors and looks forward to continuing to receive ongoing investor input, including from Corvex,” the telecommunications company said in a May 9 statement. “TW Telecom’s board is committed to creating shareholder value and believes that the company is well positioned to continue to do so.”

Icahn Protege

Bob Meldrum, a spokesman for TW Telecom, said the company doesn’t comment on speculation when asked whether it would be open to a sale. Monica Martinez, a spokesman for Broomfield, Colorado-based Level 3, also declined to comment.

Meister was a protege of billionaire activist investor Carl Icahn before leaving in 2010 to create Corvex. Ralcorp Holdings Inc. agreed to sell itself to ConAgra Foods Inc. partly because of increased pressure from Corvex, two people familiar with the matter said last year.

Following Meister’s comments last week, TW Telecom shares jumped 5.8 percent on May 8 to $28.77, the highest closing price since July 2001 and the biggest one-day climb since August 2011. Today, TW Telecom rose 1.7 percent to $29.02, a new 11-year high.

Meister’s view on TW Telecom is “consistent with our investment thesis,” Sergey Dluzhevskiy, a Rye, New York-based analyst for Gabelli & Co., said in a phone interview. “The company could be an attractive acquisition target for either a large telecom company or a large cable company looking to increase its exposure” to corporate telecom services.

Cash Flow

TW Telecom’s enterprise value of $5.1 billion is 51 times its free cash flow from the past 12 months, higher than the multiple at the 13 peers for whom information is available, according to data compiled by Bloomberg.

Acquirers will probably be willing to pay up for TW Telecom to gain access to its revenue growth, corporate clients and more than 29,000 miles (47,000 kilometers) of fiber-optic lines, said Dluzhevskiy of Gabelli, whose parent company Gamco Investors Inc. oversees about $36 billion and owns TW Telecom shares.

TW Telecom sales are forecast to reach $1.8 billion in 2015, up 22 percent from 2012, according to the average of analysts’ estimates compiled by Bloomberg. That compares with the median projected growth rate in the company’s peer group of 10 percent, the data show.

‘Strategic Fit’

Dluzhevskiy said the company could fetch $32 a share, or 12 percent more than yesterday’s close of $28.55, in a takeover.

CenturyLink and Level 3 could be drawn to TW Telecom as they seek to bolster their ability to provide direct connectivity to end customers, said John Krause, an Appleton, Wisconsin-based analyst at Thrivent, which oversees about $82 billion, including TW Telecom shares.

“This would be a strategic fit for a number of companies that are looking for scale,” Krause said in a phone interview. CenturyLink and Level 3 “would desire the growth, diversity and the assets.”

Debra Peterson, a spokeswoman for Monroe, Louisiana-based CenturyLink, said the company doesn’t comment on speculation.

Time Warner Cable and Comcast may be more logical acquirers of TW Telecom because they have the financial firepower to fund a takeover, said Donna Jaegers, a Seattle-based analyst at D.A. Davidson who personally owns TW Telecom shares. Time Warner Cable of New York has a market capitalization of $29 billion and Philadelphia-based Comcast is valued at $113 billion, compared with $23 billion at CenturyLink and $5.1 billion for Level 3.

Corporate Clients

While a deal is more likely in about two years, the two largest U.S. cable television providers could be drawn to TW Telecom’s almost-nationwide network as they seek to attract more corporate clients, Jaegers said. Time Warner Cable and Comcast are facing increased competition from AT&T Inc. and Verizon Communications Inc. for television and high-speed Internet customers.

“The cable guys have to realize that they’re going to have more issues ramping up their own efforts in mid-size and large business customers,” she said in a phone interview. “Customers do want someone with a nationwide platform and a richer product set. TW Telecom would have that appeal.”

John Demming, a spokesman for Comcast, and Time Warner Cable’s Justin Venech declined to comment on whether their companies are interested in buying TW Telecom.

Jaegers estimated TW Telecom could fetch $35 to $40 a share in a takeover, or as much as 40 percent more than yesterday’s closing price.

Sticker Shock

That kind of price tag may cause some buyers to balk, even if they find the assets attractive, according Frank Louthan, an Atlanta-based analyst at Raymond James.

“I don’t see them as being an asset that everyone has to have,” he said in a phone interview. “It’s nice to have and it’s something that another telecom company could take a lot of costs out of, but not necessarily something that they have to have.”

Level 3, in particular, would have a difficult time pulling off a deal of this size because its leverage would require the company to pay with stock, which may not be attractive to TW Telecom’s board, Louthan said. Level 3 has $8.5 billion in total debt, more than its stock-market value.

While Time Warner has the financial wherewithal to do a deal and is the “most natural buyer” of TW Telecom, the cable company may not be motivated to seek a deal “unless it looks like someone else is about to snatch it away.”

TW Telecom’s attractive assets and client base may make a takeover inevitable, said Synesael of Cowen.

“It’s just a matter of time before a deal gets done,” Synesael said. “There’s not that many national fiber-based metro providers that remain in the marketplace today that are independent. There is a scarcity value on that asset.”

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