Time Warner Cable has several options if it wishes to preserve its investment-grade rating in the face of a potential leveraged takeover by Charter Communications, Moody’s Investors Service says in a new report, “Time Warner Cable: Options for Fending Off a Leveraged Takeover and a Drop to High Yield.” Among other possibilities, it could make itself a less attractive target for an unsolicited leveraged takeover if it made a defensive acquisition of another company.
“An investment-grade rating is key to ensuring consistent and efficient market access for a company with around $27 billion of debt, and to keep it TWC may need to make the first move by becoming an acquirer itself,” says Moody’s Senior Vice President, Neil Begley. “Aside from buying Charter Communications, we see three scenarios that could have a more favorable result for bondholders, two of which involve a takeover of another company.”
The best takeover option, Begley says, would be for TWC to initiate an all-stock merger with Cox Communications, Inc., which is wholly owned by private company Cox Enterprises, Inc. Not only would this allow TWC to keep its investment-grade rating and fend off a John Malone-led leveraged takeover by Charter, but the combined company would have more than 16 million subscribers, halving the gap between TWC and DIRECTV, which has 20 million subscribers.
But Cox Enterprises would have more to gain in the intermediate term. “Like other midsized companies, Cox Communications is likely to face issues of scale in the future, and won’t want to be left behind in the race to develop and invest in advanced technology,” Begley says. “In that context, a potential tie-up with TWC could not be ignored.” And assuming the combined entity continues to repurchase shares and Cox Enterprises is not involved, Cox Enterprises could ultimately be the biggest winner by gaining control of TWC down the road.
The second option would be for TWC to acquire Cablevision Systems, which has an extremely appealing footprint for TWC, since virtually all of Cablevision’s subscribers are relatively contiguous with TWC’s New York City operations. But such a transaction could be problematic as the family that controls Cablevision would likely prefer a stock deal over cash, and as a result the family may wish to take a more aggressive role in the combined entity’s governance.
A third, but less likely scenario, Moody’s says, would be for Charter Communications to walk away, deeming TWC too challenging to acquire due to the significant debt financing that would be involved. In that event, TWC would keep its investment-grade rating, leaving bondholders to gamble that Mr. Malone will keep his distance in the future.