Will Comcast Join Charter in Dismantling Time Warner Cable?

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If Time Warner Cable (NYSE:TWC) is ever acquired, the story of that acquisition will be a convoluted one. When rumors of a possible acquisition were gaining momentum in the later half of 2013, Comcast (NASDAQ:CMCSA) was often included, along with Charter Communication (NASDAQ:CHT), in lists of companies interested in securing Time Warner Cable’s infrastructural assets and its customers. Charter’s desire to acquire its much-larger rival was finally made public earlier this week when the company’s President and Chief Executive Officer Tom Rutledge sent a letter to Time Warner Cable’s Chair and Chief Executive Officer Rob Marcus. While Charter’s $37.4 billion cash-and-stock bid was rejected, the company has not given up its aspirations, and Comcast could play a role in its latest acquisition bid.

Through individuals familiar with the cable provider’s plans, Reuters learned Charter approached Comcast Wednesday with the intention of discussing a partnership that would allow the two companies to divide the infrastructure and customers of Time Warner Cable — the second-largest cable provider in the United States. According to the publication’s sources, Charter, which is the fourth largest cable provider, and Comcast, the largest provider, have begun to work out the terms of permanent alliance. One possibility is that Charter purchases all of Time Warner Cable and then sells some subscribers and markets to Comcast. That option would make the acquisition less of a burden to Charter’s balance sheet; the market capitalization of Time Warner is nearly twice that of Charter.

While the company’s investor presentation detailing the benefits of the deal noted that synergies will result in annual savings of $500 million — and grow to $750 million over time — Charter would have to take on as much as $20.5 billion in new debt to finance the deal. That debt would amount to $72.16 per share, which would bring the company to a leverage ratio, a measure of how much debt Charter has on its balance sheet, of 4.8 times to five times. To ease the burden on the company’s balance sheet, Charter could implement “swaps and divestitures” to make the regions it serves more efficient, according to one of the slides in the presentation. In the event the two companies ink an agreement, certain geographic markets would be sold to Comcast, as the company is not interested in doing swaps. However, at this time, it is not clear which markets are under discussion. Likely, Comcast is most interested in Time Warner Cable’s largest markets — New York, Los Angeles, and Dallas.

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