Time Warner Lands Sweetheart Deal Switching to Comcast

Rob Marcus morphed into a hero for Time Warner Cable Inc. shareholders only 44 days into his tenure as chief executive officer of the cable-TV company.

Marcus, 48, yesterday announced a surprise $45 billion sale to Comcast Corp., securing almost 20 percent more for shareholders than John Malone-backed Charter Communications Inc. had offered. While Marcus refused to engage with Charter CEO Tom Rutledge after rejecting his bid, he encouraged Comcast to acquire the entire company and preferred working with Comcast CEO Brian Roberts, according to people familiar with the matter.

Marcus’s sale to Comcast will create a more dominant cable competitor against phone and satellite providers, in a deal that Time Warner Cable shareholder John Paulson has dubbed a “dream combination” with “the most capable acquirer.” Comcast, which has a market value 10 times the size of Charter, is offering Time Warner Cable investors a less volatile stock, according to data compiled by Bloomberg. Shareholders also will gain a stake in a company with about half the leverage of Charter.

“It’s really kind of a sweetheart deal,” said Peter Zeuli, chief investment officer of Voorhees, New Jersey-based Philadelphia Investment Partners LLC. “Time Warner Cable shareholders got a terrific offer because, while the balance sheet is leveraged, Comcast is a pretty strong entity when it comes to financing. With Charter being in a more precarious financial condition than Comcast, Comcast maybe has a little more leeway with shareholders.”

Zeuli’s firm used call options to bet on a rise in Time Warner Cable’s shares.

Dual Track

Both Marcus and Roberts saw themselves as running dual-track processes, said people familiar with the matter, preparing for scenarios where Time Warner Cable ended up with Charter or Comcast. Comcast and Charter had been negotiating an asset sale after a potential Charter acquisition of Time Warner Cable, according to the people.

Marcus said in December he had a close relationship with Roberts and didn’t know Malone well. He decided that a Comcast-Time Warner Cable merger would produce a better balance sheet with less debt and more cost savings, said these people. Marcus stands to receive more than $50 million in an exit package in the event of a sale, according to filings.

The deal to combine the two largest U.S. cable companies came just two days after Charter nominated a slate of directors for Time Warner Cable’s board. Investors will receive 2.875 Comcast shares for each of their shares, valuing Time Warner Cable at $158.82 a piece based on Comcast’s closing price on Feb. 12. Charter had offered $132.50 in stock and cash.

‘Better Buyer’

Today, Time Warner Cable shares rose 0.5 percent to $145.57 at 9:37 a.m. New York time. Comcast gained 1.1 percent to $53.56, and Charter lost 0.5 percent to $128.30.

Not only is Comcast’s offer higher than Charter’s, it’s also giving Time Warner Cable shareholders a piece of a stronger merged entity, according to Grayson Witcher, a Calgary-based money manager at Mawer Investment Management Ltd., which oversees about $20 billion including shares of Time Warner Cable and Comcast.

“Comcast is probably a better buyer for Time Warner Cable shareholders,” Witcher said in a phone interview. “This deal actually improves the business coming out and has less risk. It’s a company with lower debt and a better credit rating.”

Charter’s 90-day historical volatility, a measure of price swings, was 25.7 yesterday, versus 21 for Comcast, data compiled by Bloomberg show.

More Debt

Charter also carries more debt relative to profit. Its ratio of total debt to trailing 12-month earnings before interest, taxes, depreciation and amortization is 5.3, versus 2.2 for Comcast, the data show. While Comcast’s leverage may rise above its targeted level when it acquires Time Warner Cable, the company said it expects net leverage to return to 2.2 by the end of 2014.

Comcast can offer both a higher price and a stronger competitive position, said George Shipp, a fund manager at Sterling Capital Management LLC, which oversees about $45 billion and owns both Time Warner Cable and Comcast shares.

“An ostensibly stronger currency at a significantly higher price than what Charter had put on the table so far, that’s kind of a no-brainer,” Shipp said yesterday in a phone interview from Virginia Beach, Virginia. “I’m happier today than I was yesterday.”

Regulatory Hurdles

While regulators are likely to examine the deal closely, Comcast is a proven acquirer and has experience navigating the approval process, Shipp said. To help appease regulators, Comcast said it’s prepared to divest about 3 million subscribers to keep its market share below 30 percent.

Time Warner Cable’s demand for $160 a share looks smart now, according to Joshua Linder, an assistant fund manager at Calvert Investments Inc., which oversees more than $12 billion including Time Warner Cable shares.

“They reiterated several times that they felt Charter was low-balling them,” Linder said in a phone interview from Bethesda, Maryland. “Fortunately, they were able to have a white knight come in at the last minute and really validate their position of what they thought the company was worth.”