TWC Buyout Bid: Is John Malone Cheap … or Shrewd?

by Jonathan Berr | January 14, 2014 11:51 am

Billionaire John Malone must be a helluva poker player.

time-warner-cable-twc-john-maloneLast night, through his Charter Communications (CHTR[1]) cable operation, John Malone made a bid worth a total of $61 billion ($37.4 billion in cash, the rest assuming debt) on Time Warner Cable (TWC[2]), the second-largest industry player. The $132.50 per share offer — his third — was lower than TWC stock’s closing price Monday.

That probably explains why the New York-based Time Warner Cable quickly rejected it.

As if that wasn’t enough, Malone is trying to buy the remainder of Sirius XM (SIRI[3]) that he doesn’t already own through Liberty Media (LMCA[4]), another one of his companies, for $10.6 billion. Again, Malone is being accused of making a “lowball”[5] offer.

John Malone, like any good poker player, wants to avoid bidding against himself. The media tycoon has telegraphed his interest in merging with Time Warner Cable for months, arguing rightly that cable companies need to get bigger. Shares of TWC stock have surged about 40% in the six months since Charter Communications’ interest in a merger was first made public.

On the other hand, SIRI stock — a longtime favorite of short sellers — has been on the decline lately, tumbling about 55% over the last year.

Speaking on CNBC, Charter CEO Tom Rutledge noted that its offer is fair given the “big job”[6] the company will undertake in turning around Time Warner Cable, which still is reeling from its dust-up with CBS (CBS[7]) over retransmission fees. About 300,000 TWC customers quit the second-largest cable company after CBS was blacked out for 32 days.

To make matters worse, TWC also lost 24,000 broadband customers in the third quarter, the first time it had lost customers in this profitable category.

Charter plans to take its case to the shareholders, who may be receptive to his pitch. Time Warner Cable, which operates in 29 states, has about 11.5 million TV customers — that’s roughly 10 million under market leader Comcast (CMSCA[8]). Rutledge noted Time Warner Cable has lost “the equivalent of (Los Angeles)” in terms of customers over the past two years. However, BTIG analyst Richard Greenfield argues that Time Warner’s Cable’s performance is improving[9], which may force Malone to up his bid substantially.

Can Other Suitors Bid Up TWC Stock?

Speaking this morning on CNBC, Greenfield raised the possibility that Philadelphia-based Comcast would bid for TWC and perhaps sell off “a few thousand subscribers” to address any antitrust issues, which may be significant. Indeed, Comcast CEO Brian Roberts would certainly like to add the New York and Los Angeles markets to his cable business, which in the most recent quarter added customers — much to the shock of the legions of CMCSA haters on Wall Street[10].

The two companies have apparently held discussions, but nothing has come of them. If Comcast wants to make a move, it’s going to need to act soon.

Other players may emerge for Time Warner Cable. Cablevision (CVC[11]), which like Time Warner has operations in the New York City area, might be a good fit, but it seems unlikely that one company could accommodate the egos of both Malone and his counterpart at Cablevision, Charles Dolan. Moreover, Cablevision is heavily indebted.

Bottom Line

What many investors forget about Malone is that he is motivated by tax avoidance more that creating shareholder value. His offer for Time Warner Cable is $83 in cash and $49.50 in Charter stock for that reason. Malone’s offer for Sirius is being done through Liberty Media, wholly for stock, much for the same reason.

Another thing to consider is just how patient John Malone is. It took him a decade to land Virgin Media, but he did it — again for stock and cash (in that instance, nearly $24 billion of it).

Malone, whose net worth is about $6.7 billion, can afford to raise his offer for both Time Warner Cable and Sirius by quite a bit if wants to. But the greater interest he shows in both companies, the more interest Uncle Sam will show in him.

In short, John Malone is showing his companies’ own investors that he won’t overpay for a deal … however, his motivations and thrift might keep him from getting both the TWC and SIRI deals done.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

  1. CHTR:
  2. TWC:
  3. SIRI:
  4. LMCA:
  5. “lowball”:
  6. “big job”:
  7. CBS:
  8. CMSCA:
  9. Time Warner’s Cable’s performance is improving:
  10. shock of the legions of CMCSA haters on Wall Street:
  11. CVC:

Source URL:
Short URL: