Hostile Takeover

Charter Communications does not like the resistance it is getting from Time Warner Cable executives over its bid to acquire the company so Charter has nominated 13 new members for TWC’s board of directors in an effort to force executives to reconsider.

Charter calls the baker’s dozen a slate of “independent candidates” that will be willing to evaluate Charter’s offer of $132.50 a share. Time Warner Cable’s current management says it won’t negotiate with Charter unless they offer $160 a share.

“It is clear from our meetings with Time Warner Cable shareholders that there is an overwhelming desire to combine these two companies to increase Time Warner Cable’s competitiveness, grow market share and create shareholder value.  Now is the time for the current Board and management of Time Warner Cable to respond to their shareholders and work with us to complete a merger to the benefit of shareholders while minimizing their execution and market risks,” said Tom Rutledge, Charter’s CEO.  “We are nominating a full slate of highly qualified, independent directors to elect to the Time Warner Cable Board and believe that stockholders will use this opportunity to express their views.  Our purpose in this proxy contest is to enable shareholders of TWC to raise their voice, and to provide a very capable board who will hear them.”

Charter has gotten a lucky break because all 13 current TWC board members are up for re-election at the same time this spring. Many companies avoid that practice to prevent a hostile bidder from taking control of an entire company’s board.

Charter’s roster of nominees includes a number of current or former CEOs, three former Wall Street lawyers and an ex-chief technology officer that used to work for Time Warner Cable. Many were associated with hedge funds, cable operators that sold out to larger players, or companies that either went bust during the Great Recession and were bailed out by U.S. taxpayers.

Charter Communications’ ‘Rescue Team’ for Time Warner Cable

1. James Chiddix: A cable industry veteran who formally retired in 2007, Chiddix worked for Time Warner Cable from the mid-80s until 2001. He now serves as a director at Arris Group, a manufacturer of cable equipment. Chiddix served on the board of Virgin Media, acquired last year by Liberty Global — which also has an ownership interest in Charter Communications;
2. Bruno Claude: Known primarily as a “turnaround” expert, Claude has a record of restructuring troubled telecom operators by cutting jobs and negotiating with the large investment banks that generously loaned the money that fueled overvalued takeovers to write down that debt when banks realize they have no hope of being repaid in full;
3. Isaac Corre: Currently a lecturer at Harvard Law School, where he teaches a seminar on executive compensation and corporate governance, Corre spent a decade at Eton Park Capital Management, L.P., a global hedge fund. Corre specialized in “event-oriented” investments and “distressed corporate debt”;
4. Marwan Fawaz: Spent a year in a leadership role at Motorola Mobility/Motorola Home Division. He has the distinction of serving as an executive at two bankrupt cable operators: Charter Communications and Adelphia. Charter eventually emerged from bankruptcy, Adelphia did not and two members of its founding family are spending 15 years in the Allenwood federal prison, convicted of wire and securities fraud. Charter’s press release says Fawaz would be a valued addition to the board because he has “a deep understanding of the cable television industry”;
5. Lisa Gersh: Lasted less than a year as CEO of Martha Stewart Living Omnimedia. Under her leadership, the company capped a year of turmoil that included layoffs, titles closing and the failure of Martha’s underwhelming Hallmark Channel show, according to Adweek. She was also a co-founder of Oxygen Media, which was sold to NBC;
6. Dexter G. Goei: An investment banker at Morgan Stanley back when it was hip deep in sub-prime mortgages and a taxpayer bailout, Goei was gone by 2009 and became CEO of Altice, S.A., a multinational cable company growing through acquisitions and takeovers. Goei is raising more capital through a stock IPO managed by Goldman Sachs and… Morgan Stanley;
7. Franklin (Fritz) W. Hobbs: In addition to serving as an adviser to private equity firms and director of Molson Coors Brewing Co., Hobbs has served as board chairman at Ally Financial, formerly GMAC, as GM declared Chapter 11 bankruptcy and was bailed out by U.S. taxpayers;
8. Neil B. Morganbesser: An investment banker, Morganbesser worked on mergers and acquisitions at Bear Stearns & Co., until the company’s sub-prime hedge funds sank like the Titanic. The investment firm was seeking taxpayer assistance, but ended up being acquired by J.P. Morgan in a hastily arranged deal instead. Charter claims Morganbesser has 20 years of experience providing financial and strategic advice to a full range of clients, including entrepreneurs, large corporations, governments, etc., but evidently wasn’t much help to his employer during the global financial crisis.
9. Eamonn O’Hare: Served as the chief financial officer of Virgin Media Inc., the UK’s leading cable television business, from 2009 until 2013. Unfortunately for him, most U.K. residents prefer satellite TV. But that didn’t hurt his bottom line. After Liberty Global acquired the operation in 2013, O’Hare got to share over $367 million in cash bonuses with certain other Virgin executives coming from a company that also has a vested interest in Charter Communications;
10. David A. Peacock: Another beer guy, Peacock most recently served as the president of Anheuser-Busch;
11. Michael E. Salvati: Another mergers and acquisitions guy, Salvati has been president at Oakridge Consulting, Inc., which provides interim management, management consulting and corporate advisory services to companies ranging in size from start-ups to multinational corporations, since February 2000. In short, he tries to promote financial growth at companies recently merged or acquired;
12. Irwin Simon: Founder of the Hain Celestial Group, a leading “natural and organic products company.” Brands including Arrowhead Mills, Bearitos, Rosetto and Rice Dream are well-known in organic food sections of local supermarkets, although few customers probably realize they belong to a giant conglomerate. Other divisions, specializing in “woo-woo personal care” offer dubious “calming body washes” costing $13 or more that feature extract of marigold. Charter says Simon would bring “his unique perspective on all aspects of advertising and marketing services” to a newly merged Charter-Time Warner Cable;
13. John E. (Jack) Welsh III: president of Avalon Capital Partners LLC — another private equity investment firm.

“If Time Warner Cable management refuses to negotiate on reasonable terms, we believe Charter will likely secure the votes required to win a proxy fight,” said Jonathan Chaplin, a research analyst with New Street Telco.

“It is clear that Charter is nominating a slate of directors for the sole purpose of pressuring our Board into accepting the same lowball offer that it previously considered and unanimously rejected,” said Time Warner Cable CEO Rob Marcus. “Our Board remains focused on maximizing shareholder value. We are confident in our strategic plan, which was detailed publicly on January 30, and we are not going to let Charter steal the company.”

Marcus may have one last card to play should Charter’s nominees end up on Time Warner Cable’s board of directors. All board members must serve the best interests of the company they oversee, not the company that helped get them elected. An independent evaluation of Charter’s offer must not be influenced by outsiders, or the board members may face lawsuits from angry shareholders. The Wall Street Journal notes this requirement has tripped up hostile bidders before. Air Products & Chemicals Inc. won three board seats at Airgas Inc. which Air Products had tried to buy back in 2010. Once on the board, the new board members recommended against the deal.

Comcast Corporation and Charter Communications are actively working on a deal to let Comcast acquire Time Warner Cable subscribers in New York, New England, and North Carolina, according to sources reporting to CNBC.

The split-up of Time Warner Cable is contingent on a successful takeover bid by Charter Communications, which would quickly sell the systems in the three regions to Comcast for an undisclosed sum.

CNBC reports Comcast and Charter are close to agreeing on terms, but Time Warner Cable and Charter remain far apart on the terms of Charter’s takeover bid.

Comcast’s involvement in the deal could inject much-needed cash into a takeover bid financed largely by debt. It might also prompt Charter to sweeten its offer for TWC.

Comcast’s interest in the northeast and mid-Atlantic region is not surprising. The cable company already has a large presence in eastern Massachusetts, New Jersey, Maryland, D.C., and Virginia. Time Warner Cable is the dominant cable company in New York, western and northern New England, and North Carolina.

Charter would likely keep Time Warner Cable’s operations in Texas, California, the midwest and south for itself if it succeeds in a takeover.

Charter has reportedly has hired Innisfree M&A, a proxy solicitor, to prepare for a possible proxy fight with Time Warner. Innisfree specializes in convincing shareholders to agree to proposed mergers and acquisitions.

Liberty Media, which has a substantial ownership interest in Charter Communications, is also appealing directly to Time Warner Cable stockholders and is planning to run its own slate of candidates for Time Warner Cable’s board of directors. Should Liberty-nominated candidates attract a majority of votes at the annual shareholder meeting in May, the new board members are expected to quickly approve a sale of the cable company.

[flv]http://www.phillipdampier.com/video/Bloomberg Comcast Charter Near Pact on Time Warner Assets 1-27-14.flv[/flv]

Comcast Corp. is near a deal to buy New York, North Carolina and New England cable assets from Charter Communications, Inc. if shareholders approve Charter’s takeover bid for Time Warner Cable Inc., people with knowledge of the matter said. Alex Sherman reports on Bloomberg Television’s “Money Moves.” (3:28)

Time Warner Cable executives brushed away Charter Communications’ first public offer to acquire the second largest cable company in the country in a debt-financed deal that Time Warner considers a lowball offer.

“[Charter’s] proposal is grossly inadequate,” Time Warner Cable said in a statement. “We are confident in our standalone plan and we are not going to let Charter steal the company.”

Charter’s combined service areas, if they win control of Time Warner Cable.

On Tuesday, Charter violated a long-standing, informal Code of the Cable Cartel that keeps cable companies from attacking each other.

Charter Communications chief operating officer John Bickham launched an investor presentation that trashed Time Warner Cable and its leadership, and contended fixing the cable company will take more work than first envisioned.

Bickham claimed Time Warner has exhibited a decade of a “failed operating strategy revealed by fact that they are losing customers at an alarming rate,” while Charter has a proven track record of performance.

Bickham

Historians recollect Charter’s recent past differently. In 2009, mired in debt and lacking a disciplined business plan, Charter declared Chapter 11 bankruptcy, wiping out shareholders and stiffing creditors.

Bickham capitalized on Time Warner’s 2013 summer of discontent, when a dispute with CBS resulted in the loss of the network from Time Warner Cable lineups (along with Showtime) in some of the biggest cities in the country. Combined with rate increases, subscribers began switching to the competition, especially where Verizon FiOS and AT&T U-verse gives cable operators stiff competition from money-saving new customer promotions.

Bickham described TWC as a company in shambles:

On Time Warner Cable TV: “It appears that Time Warner didn’t want to spend the money to go all-digital,” adding that the quality of TWC’s TV signal is poor and the company still lacks enough HD channels that could have been on the lineup if the cable company dropped analog service long ago.

On Time Warner Cable Internet: Bickham complained Time Warner is offering deep discounts on slow Internet packages, particularly its campaign targeting DSL customers with 2Mbps service for $14.99 a month. Bickham complains the large variety of Internet speed tiers are unnecessary, resulting in “nickel-and-dime charges to customers.” He argues Time Warner needs to simplify its offering by adopting a digital lineup and boost Internet speeds, so customers get at least 30Mbps service. Bickham did not mention Charter Communications also has a usage cap on its broadband products. TWC does not on most offerings.

On Time Warner Cable employees: “TWC never had a vision on high standards” for how the company manages its 50,000 employees. Bickham feels the workmanship of TWC installers leaves a lot to be desired.

[flv]http://www.phillipdampier.com/video/Bloomberg Time Warner Cable Rejects Charter Offer 1-15-14.flv[/flv]

Time Warner Cable rejected an acquisition offer from Charter Communications valued at more than $61 billion including debt, spurning the biggest unsolicited takeover bid since 2008. Manus Cranny examines why the offer was rejected on Bloomberg Television’s “Countdown.” (2:06)

Charter’s proposed price comparison chart, produced for the benefit of Time Warner Cable shareholders, assumes worst-case pricing almost no Time Warner Cable customer actually has to pay.

Charter is America’s second worst rated cable company. (Consumer Reports, 2013)

On its face, Charter’s plan for Time Warner Cable doesn’t look all bad, but execution is critical and Charter has a long-standing and very poor record of customer satisfaction, typically ranked in consumer surveys as America’s second worst cable operator year after year.

Should Charter win control of Time Warner Cable, big changes will be in store for TWC customers under the Charter umbrella:

• Analog television would be phased out, along with “limited basic” packages. Charter wants to repurpose analog spectrum for faster Internet speeds, but that also means video customers will be required to get more set-top boxes;
• Eliminate “Switched Digital Video” technology now in place on TWC systems. SDV is a bandwidth saver – only delivering digital TV signals customers in a particular neighborhood are actively watching. But those using inexpensive digital-to-analog set-top boxes on analog-only televisions can’t watch SDV channels, inconveniencing customers;
• Increase the number of HD channels to 200+;
• All residential set-top boxes would now support HD signals at no added cost and customers will be able to get up to four DVR boxes for $20 a month;
• Time Warner Cable’s new minimum Internet speed would be 30Mbps with much faster added-cost tiers available, but usage caps will apply;
• Time Warner Cable’s phone product would be repriced at $30 a month in the first year, $20 in the second with all calling features and voicemail included;
• No term contracts will be offered and modem rental fees, regulatory surcharges, added taxes on Internet and Phone, and service visit fees will no longer be charged.

Charter customers can expect aggressive sales pitches for their “high value” triple-play bundle which may include services customers don’t want at a price that is largely non-negotiable. The more boxes and services you add, the greater the discount you will receive. In contrast, Time Warner Cable began de-emphasizing its triple play promotions in early 2012 and now aggressively promotes single and double play packages that typically omit phone service.

Unlike TWC, Charter has been more difficult when trying to negotiate customer retention discounts. Charter generally charges the same prices everywhere.

Their proposed offer for Time Warner customers will be a triple play offer starting at $110 a month for the first 12 months, then increase $20 in the second year to $130 a month and in year three the price will rise again to $150 a month. Charter’s typical “step-up” pricing is in $20 increments.

Charter is reluctant to allow customers to add or drop package components, so for most customers packages will be all-inclusive with no discounts for dropping channels or features. That means customers will likely end up with more television channels, more phone features, and faster Internet speeds, but at the cost of an eventually higher cable bill.

Any buyout could also mean some Time Warner Cable territories could be put up for sale to a third-party. Charter is especially interested in the New York and Los Angeles markets, but may have little interest in western New York and Ohio, New England, Kentucky and Wisconsin. Any orphaned TWC customers would likely be snapped up by companies like Comcast, which may join Charter’s takeover bid.

Any sale would need approval by the Federal Communications Commission and potentially the Justice Department’s Antitrust Division, especially in Comcast becomes involved.

[flv]http://www.phillipdampier.com/video/CNBC Tom Rutledge Explains Charter Offer for TWC 1-15-14.mp4[/flv]

Time Warner Cable rejected a merger proposal from Charter Communications. Tom Rutledge, Charter Communications president and CEO, explains the offer as he describes as “rich and fair.” We feel like we’ve come a far way and have not received a serious response, Rutledge says. A CNBC exclusive. (4:35)

As expected for months, Charter Communications, Inc. today formally offered Time Warner Cable shareholders $132.50 per share to assume ownership of the nation’s second largest cable operator in a deal worth more than $61 billion, including debt.

Bloomberg News this afternoon reported Charter Cable has offered $83 in cash for each outstanding share of TWC stock, as well as about $49.50 in Charter stock. That makes the attempted takeover the third largest merger deal worldwide since 2009.

Rutledge

Charter CEO Thomas Rutledge, a former executive at TWC and Cablevision would lead the combined enterprise under the Charter Cable name, likely pushing out TWC’s new CEO Robert Marcus. Rutledge argues that combining Charter and TWC would bring about considerable cost savings, particularly for spiraling programming costs. Analysts say the deal would also mean a reduction in Time Warner Cable’s workforce, especially in middle management, as operations are consolidated around Charter’s leadership.

Rutledge today said he privately approached Time Warner Cable executives with an offer in late December.

“We haven’t received a serious response,” Rutledge said today in a Bloomberg News telephone interview. “Our objective was to talk to management and try to get them engaged. They have not, so we’re going to make our case to shareholders about why this deal is good for them and hope they ask management and the board to watch out for the interests of shareholders.”

[flv]http://www.phillipdampier.com/video/CNBC Marangi on TWC Deal 1-13-14.mp4[/flv]

Chris Marangi from Gamco tells CNBC Charter Communications’ proposal to buy Time Warner Cable for $61.3 billion is probably too low, but the cable industry is “ripe for consolidation” and further mergers are likely. (1:39)

Time Warner Cable’s chief financial officer Artie Minson reportedly requested Charter make a higher bid that included more cash, but Charter refused.

Malone

The man pulling the levers behind Charter’s curtain is Dr. John Malone, former CEO of Tele-Communications, Inc., which was America’s largest cable operator in the late 1980s and 1990s. Malone’s Liberty Media is Charter Communications’ largest single investor. Malone has long argued for consolidation and cooperation in the cable industry to boost profits and control programming costs that drive up cable television bills.

Malone specializes in structured mergers and acquisitions that result in tax-free buyouts. Charter’s offer relies heavily on debt financing and would allow Charter to shield its ongoing net operating losses from taxes.

Malone indicated he is willing to play hardball to force a merger.

Malone told investors he expected Time Warner Cable to resist a takeover by Charter — America’s fourth largest cable company — so he is prepared to nominate Charter-friendly directors for Time Warner Cable’s board before nominations close Feb. 15. Time Warner Cable shareholders could force the merger by voting for Malone’s handpicked directors, who would promptly approve Charter’s takeover offer. But Time Warner executives will likely argue Charter’s offer is disadvantageous for TWC shareholders.

“Since we made our first proposal, Time Warner Cable has lost another half million video customers,” Rutledge said. “Their customer service continues to decline in every measure. We can improve it. We have a demonstrated track record of improving customer service. It’s a question of credibility.”

Consumer Reports reports otherwise. Charter Communications has perennially been ranked America’s second worst Internet Service Provider cable operator in annual reader surveys. Only Mediacom is ranked lower among cable operators.

Now that Charter’s offer has gone public, investors suspect other cable operators may soon consider bidding for Time Warner Cable as well. Comcast is a likely bidder with an interest is taking control of Time Warner Cable’s systems in New York City and certain midwestern markets. Comcast would also like TWC’s regional sports channels serving southern California.

Customers will have no say in the matter, except through appeals to federal regulators which must approve any sale.

Unlike TWC, Charter Cable has usage limits on their broadband service.

[flv]http://www.phillipdampier.com/video/CNBC CNBC David Faber on TWC Deal 1-13-14.mp4[/flv]

CNBC’s David Faber reports today’s offer from Charter Communications is not technically a “bid” for Time Warner Cable. Instead, it’s a public offer to hopefully force TWC executives to take Charter’s offer more seriously. (3:25)

The trend towards cable consolidation is no longer just limited to cable operators. Now programmers are looking to strengthen their position in cable carriage negotiations by building “must-have” packages of cable programming that could mean smaller independent channels could eventually get locked out.

Bloomberg News reports the board of Discovery Communications, owner of the Discovery Channel, is discussing a possible bid for Scripps Networks Interactive, which runs channels including HGTV and the Food Network.

Scripps is one of the smaller network owners, but one that has proven popular and profitable. But it is not tied to a media conglomerate or the cable industry directly. Discovery has been a part of the cable television lineup for decades. Cable TV billionaire Dr. John Malone controls 29 percent of Discovery’s voting rights, giving him significant influence at the company.

A combined operation would control these networks:

Discovery:

• TLC
• Animal Planet
• Oprah Winfrey Network
• Destination America
• Investigation Discovery
• Discovery Fit & Health
• Discovery Science
• Military Channel
• Science
• Velocity

Scripps:

• HGTV
• Food Network
• DIY Network
• Cooking Channel
• Great American Country
• Travel Channel

Some analysts suggest such a combination doesn’t make much sense for Discovery, which has been focused on expanding operations internationally.

But other bidders might surface for Scripps, reports Bloomberg, which may be a complementary business for 21st Century Fox, Time Warner or Viacom, said Eric Handler, an analyst at MKM Partners, in a research note.