Broadband Cable Association of Pennsylvania

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July 1, 2013

Liberty Media Corp. failed in a direct attempt to interest Time Warner Cable Inc. in a merger with Liberty's cable affiliate Charter Communications Inc., so now Liberty is trying a different method: talking up a deal to investors.

In separate private investor meetings over the past eight days, Liberty executives and the chief executive of Charter, which is 27%-owned by Liberty, have discussed the benefits of cable consolidation. And in one of the meetings, attended by Liberty executives late last week in Denver, Liberty Chief Executive Greg Maffei confirmed he was interested in pursuing a deal with Time Warner Cable but not done in a hostile manner, say people who were present. Mr. Maffei, like Liberty Chairman John Malone, is on Charter's board. Mr. Maffei also told investors at the Denver meeting that uncertainty hovers over Time Warner Cable's management team-Time Warner Cable CEO Glenn Britt is expected to leave at the end of the year-and that Wall Street has forecast slower growth for the company, the people said. He said it is up to Time Warner Cable's board and shareholders to make a decision about who should be running the company.

At a Charter investor meeting in Boston on Wednesday, Charter Chief Executive Tom Rutledge declined to comment when asked about his interest in Time Warner Cable, according to people who were present. But he indicated that he sees eye-to-eye with Mr. Malone, who earlier this month at Liberty's annual meeting said Charter could be a "horizontal acquisition machine." Both investor meetings follow media reports earlier this month, including in The Wall Street Journal, that Mr. Maffei met with Time Warner Cable's Mr. Britt several weeks ago and discussed cable consolidation. During the meeting, Mr. Maffei raised the possibility of a combination of Charter and Time Warner Cable, without proposing anything specific, people familiar with the situation have said. Mr. Britt showed little interest, those people said.

A person close to Time Warner Cable said it has deep concerns about the logic of a combination with Charter, whose operations are spread across 25 states. Time Warner Cable, in contrast, is concentrated in a handful of geographic areas, like New York and Southern California. Still, the person said that if an offer with a significant premium was made, it would be considered. One of the people present at Liberty's meeting in Denver said he came away with the impression that Liberty was hoping investors would put pressure on Time Warner Cable's board to be more open to a deal.

One major problem for Liberty and Charter is that Time Warner Cable is much bigger than Charter: Time Warner Cable's market capitalization is nearly $33 billion. Including net debt, its enterprise value is about $54 billion. Charter has a market capitalization of $12.5 billion and debt of $12.8 billion, making it approximately half Time Warner Cable's size. Time Warner Cable, the fourth-biggest pay-television operator by subscribers, has about 12 million video subscribers, compared with Charter's nearly four million.

The meetings have had an impact on investors. Time Warner Cable's stock is up 12% since the Denver meeting on June 20, having risen earlier on reports of the Maffei-Britt meeting, while Charter stock is up 9%. And in the last few days, several analysts have released notes analyzing the benefits and costs of a Time Warner Cable-Charter deal for both companies. In a note, Barclays Credit Research said that "a transaction could have strategic merit, given complementary footprints in certain markets" and other savings that come with bigger scale. But Barclays noted that "the likelihood of a near-term transaction remains low" because the premium Charter and Liberty Media would have to pay to acquire Time Warner Cable could offset potential savings benefits.

Another potential target for Liberty and Charter is Cablevision Systems Corp., which has about three million subscribers in the New York area, making it easier for Charter to swallow. Mr. Malone left people at the Denver meeting uncertain about his interest in Cablevision, however. He told the meeting that Cablevision is very valuable and noted its potential synergies with Time Warner Cable. But he said Cablevision faces a lot of competitive pressures, as it is overrun by Verizon Communications Inc.'s FiOS service in a large portion of its service area. The big question about Cablevision, however, is whether its controlling shareholders, the Dolan family, are willing to sell. A Cablevision spokesman declined to comment. Either way, Mr. Malone made clear his desire to do a deal, those present said. "John Malone thinks the opportunity for cable consolidation is real given the need for scale to combat rising programming costs and capitalize on the business services opportunity," said Vijay Jayant, analyst at ISI Group. Wall Street Journal; more in New York Times

The bidding war for online video site Hulu was extended to give DirecTV more time to work out financing, according to news reports Friday. The New York Post said the satellite television operator is one of the leading suitors, along with Guggenheim Digital Media and Chernin Entertainment, which has partnered with AT&T Final bids were due Friday but have been pushed to at least the middle of next week, the report added. Earlier this month, reports suggested that bids were coming in around $1 billion. Spokespeople for DirecTV, Guggenheim and Hulu declined to comment. A representative of The Chernin Group didn't respond to a request for comment.

Hulu, which is owned by FOX Business parent News Corp. Walt Disney and Comcast received initial bids from a wide range of suitors. Yahoo and KKR are also interested, but several reports Friday indicated that their offers were low and will likely push them out of the running. Another bidder, Time Warner Cable is offering to buy just a portion of Hulu. The Los Angeles-based site was previously put on the block in 2011 and is back up for sale as its owners disagree over how to generate revenue. News Corp. is said to prefer paid subscriptions for Hulu, while Disney has pushed for free video streaming and generating revenue from ads. Disney and News Corp. each own about one-third of Hulu. Comcast owns most of the remaining third but gave up control after acquiring NBC Universal.

According to its website, Hulu has more than three million subscribers who pay $7.99 a month for its Hulu Plus premium service. It generated $700 million in revenue last year, including advertising sales. Shares of DirecTV rose 1.8% to $61.85 in late morning trading, while AT&T was trading five cents lower at $35.58. Yahoo! slid 1.6% to $25.06. Time Warner Cable shares continued to climb, a day after Bloomberg News reported that Liberty Media Chairman John Malone was exploring ways Charter Communications could work out a deal for the cable company. On Friday, the stock jumped 2.74% to $111.19. Fox Business

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