January 14, 2014
Charter Communications Inc. went public with a long-awaited, $37.4 billion cash-and-stock bid for Time Warner Cable Inc. that the nation's second-largest cable-television company had privately rebuffed. The offer, valued at $132.50 a share, including $83 a share in cash and $49.50 in Charter stock, was disclosed in a letter Monday from Charter Chief Executive Tom Rutledge to Rob Marcus, his counterpart at Time Warner Cable. The bid is only slightly above Time Warner Cable's closing share price on Monday of $132.40, though the stock has risen some 40% since Charter's interest in the combination first surfaced in June. Charter's latest proposal, which it made to Time Warner Cable in December, was its third private offer to buy the New York-based cable company since June.
By making the letter public, Stamford, Conn.-based Charter, backed by billionaire John Malone's Liberty Media Corp., is seeking to enlist shareholders of Time Warner Cable to put pressure on the company's management and board to negotiate a deal. "Our intent is to talk to Time Warner Cable shareholders and convince them that putting together the companies, fixing [Time Warner Cable's] customer service issues and getting the company back on a growth trajectory will create enormous value for shareholders," Mr. Rutledge said in an interview. He said Charter, the fourth largest-U.S. cable operator, has no plans to increase its offer.
In a statement, Time Warner Cable rejected the offer, calling it "grossly inadequate." In addition to the price being too low, Mr. Marcus said "the actual value delivered to [Time Warner Cable] shareholders could be substantially lower given the valuation, operational, and significant balance sheet risks embedded in Charter's stock." Mr. Marcus added that Time Warner Cable previously told Charter in December that it would be open to a deal at a price of $160 a share, including $100 a share in cash. He said in an interview Charter's current offer for Time Warner Cable would be "essentially letting them steal" the company.
Charter's bid comes at a critical moment for Time Warner Cable, nearly two weeks after longtime CEO Glenn Britt was succeeded by Mr. Marcus, who was formerly chief operating officer. A longtime corporate lawyer with deal experience, Mr. Marcus is under pressure to lift Time Warner Cable's performance. The company in recent quarters has lagged behind other big cable operators such as Comcast Corp. in subscriber retention.
Comcast, the nation's biggest cable operator by subscribers, has contemplated making its own offer for Time Warner Cable, people familiar with the situation have said. Comcast has a stronger balance sheet than Charter, but it would also likely face tougher regulatory hurdles. Charter is betting that its management team can run Time Warner Cable more efficiently. Mr. Rutledge is a cable veteran who worked at Time Warner Cable until 2001 and for most of the past decade was a senior executive at Cablevision Systems Corp. In addition to cost savings the company says it can reap from merging with its rival, Charter also has significant tax-loss carry forwards that the combined company could benefit from. But winning over Time Warner Cable's management won't be easy.
Time Warner Cable's chief financial officer, Artie Minson, told an investor conference last week that "the business isn't for sale" and said the company is happy with its growth prospects. "But we also recognize we're sort of stewards of the shareholders," he said. "And to the extent someone comes along with an offer that's better than the value we can create on our own, that's obviously something we need to take a hard look at." He added, "That's a pretty high bar." In a statement accompanying its letter, Charter said that in response to its first two approaches-the second one came in October at about $127 a share-Time Warner Cable "chose not to engage or find out more." Then the companies' executives met in December to discuss Charter's offer, "but the flow of information has been exclusively one-way," according to Charter. Mr. Marcus in an interview said "we told [Charter] what it would take to get a deal done, and they chose not to go down that path."
The timing of the latest Charter bid is important: Thursday is the start of a month-long window during which Time Warner Cable investors can make nominations to the company's board. Activist investors in favor of the deal could thus mount a proxy battle for control of the board. Asked in the interview about nominating directors to Time Warner Cable's board, Mr. Rutledge said "we haven't discussed it."
Charter's pursuit of Time Warner Cable is an audacious strategy given the companies' relative sizes. Charter has a video subscriber base of 4.2 million, compared to Time Warner Cable's 11.4 million. Charter's market capitalization, meanwhile, is about $14 billion, well less than half that of Time Warner Cable.
Liberty, which bought a 27% stake in Charter last year, sees Charter as a vehicle to consolidate the fragmented cable-TV industry. Over the past six months, Charter and Liberty executives have talked up the potential benefits of cable industry consolidation, such as programming cost savings and opportunities to create new online video and national interactive advertising products. The cash portion of Charter's latest offer is expected to be financed by as much as $25 billion in debt the company arranged in recent weeks, people familiar with the matter have said. Given Charter and Time Warner Cable's existing debt, these extra borrowings would mean the combined company would have a total debt burden of around $64 billion. Such a debt pile would likely cost Time Warner Cable its investment grade credit rating, analysts have said. Wall Street Journal
With more people using their smartphones to check for rain, the Weather Channel's place in the television universe is suddenly uncertain.
In a dispute that captures how changing media habits are disrupting the established TV world, DirecTV is seeking to reduce the fees it pays to carry the Weather Channel by more than 20%, according to a person familiar with the situation. DirecTV's request has sparked a bitter confrontation that has caused the channel to be blacked out on the satellite-TV service since Monday night, in what is the channel's first blackout since it was launched more than 30 years ago. DirecTV won't comment on its rate requests, but the satellite firm has made clear its view that a growing reliance on digital services has reduced the need for the TV channel. "People are increasingly getting their weather info on demand on their devices, whether it's weather.com or apps," says Dan York, chief content officer of DirecTV. The proliferation of weather news on Web and mobile platforms is "decreasing value and usage on the linear TV service."
David Kenny, chief executive of the channel's parent, Weather Co., disagrees. "At the time of severe weather, TV is still where people go," he says. DirecTV's request for a "huge" fee reduction "didn't make sense, and we couldn't be the same service" if it was implemented, he added. Weather Channel's average daily audience has fallen 19% to 214,000 since 2011, Nielsen data shows, although the average climbed to 326,000 between Jan. 3 and Jan. 11, when the weather in much of the U.S. turned unusually cold.
To be sure, some of Weather Channel's loyal fans have followed it online. Its websites and mobile apps have consistently been among the most popular. The sites drew 89 million unique visitors in November, according to comScore, up 8% from the previous month. Weather Co. sites-including Weather Underground-rank as the 13th largest Web property on smartphones, reaching about 33% of the mobile media audience, comScore estimates. Sean Collier, a 36-year-old financial-software technician in Austin, Texas, says he used to rely on the Weather Channel on TV. But ever since he got his iPhone two years ago, the channel hasn't been much use to him. "My Weather Channel watching is now zero," he says. "I use the Web and mostly mobile apps now for my weather needs," including the Weather Channel's mobile app.
Still, a viewer online or on a mobile app is worth less to the company than a TV viewer. Weather Co. sells ad time at higher rates on its TV channel than on mobile apps or the Web, media buyers say. And the fees paid by pay-TV operators ensure the TV channel is more profitable than the digital businesses, according to a person familiar with the company, even though the two sides account for roughly the same proportion of ad revenue. Atlanta-based Weather Co., which is owned by a consortium that includes NBCUniversal Inc. and private-equity firms Blackstone Group L.P. and Bain Capital LLC, is asking DirecTV for an increase of one cent a subscriber each month, according to the company. That compares with its current fee of 13 cents a subscriber a month, estimates SNL Kagan. Mr. Kenny said Weather Channel wasn't making an "egregious" demand. "We are not trying to be...pigs," he said.
DirecTV is the second biggest pay-TV provider, serving more than 20 million people, so a blackout would have an immediate impact on the channel's potential audience. But accepting a reduction in its fees could hit the channel and its parent company, Weather Co., hard, and potentially lead other pay-TV providers to make similar demands. The channel is in more than 100 million households, according to the company. The TV channel has revamped its programming to try to retain viewers. It has brought in high-profile talent, including Sam Champion, the long-time "Good Morning America" anchor, and reworked its TV programming to rely less on weather forecasts, adding other content including reality-TV programs. But DirecTV is critical of that shift. Mr. York noted that 40% of the Weather Channel's content is now reality programming like "Highway Thru Hell," while "our customers have been asking for 24/7 weather coverage."
The dispute echoes rising tensions between pay-TV operators and TV-channel owners over fees and, more recently, digital availability of programming. DirecTV, like other pay-TV distributors, has been a vocal critic of rising programming costs demanded by TV-channel owners. DirecTV Chief Financial Officer Pat Doyle said in December at an investor day that "we are going to continue to look at marginal channels, and we are going to be prepared to drop those." In what may have been a harbinger of this dispute, DirecTV in recent weeks added a small independent weather channel called WeatherNation right next to Weather Channel. Adding to pressure on Weather Channel, the outlet isn't negotiating as part of a group of channels. While NBCU is a minority shareholder, it isn't involved in the negotiations. Wall Street Journal
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