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 Charter, backed by billionaire John Malone's Liberty Media Corp, had
been pursuing Time Warner for months, but was not making any headway
as its larger rival — nearly three times its size by market value — asked for $8 billion more than what it had offered.
But Comcast actually believed Time Warner Cable's $160 per share
counter to Charter's $132.50 per share bid was reasonable, several
people familiar with the situation said on Thursday. At the same
time, it worried that splitting a public company with assets in
multiple markets and millions of subscribers would be tough, made
even harder by the acrimony that had built up over the past eight
months between Charter and Time Warner Cable.
On February 4 Comcast and Charter met in a last-ditch attempt to see
if they could work out their differences, the sources said. They
could not.
So later in the day, Comcast Chief Executive Brian Roberts called
Time Warner Cable's Rob Marcus to say that he was ready to make a
bid for all of Time Warner Cable at a figure close to the asking
price, according to the sources.
On Thursday, the two announced a $45.2 billion all-stock deal to
create a cable behemoth, with an empire stretching from New York to
Los Angeles. The deal is the largest M&A transaction so far this
year and the third-largest in the media and entertainment sector of
all time, according to Thomson Reuters data.
If the deal closes, it could give Comcast unprecedented leverage in
negotiations with content providers and advertisers. For that reason
it is also likely to come under keen regulatory scrutiny.
Representatives for Time Warner Cable, Comcast and Charter declined
to comment on details of the negotiations. All the sources asked not
to be named because the conversations were private.
Interviews with several people who were intimately involved in
negotiations, however, paint a picture of what went on behind the
scenes over the last few days as the deal came together and how
Charter lost a prize that it had worked so hard to win.
In some ways, these sources said, the two companies have Charter to
thank for the deal. Although Comcast, the top U.S. cable operator,
had always been intrigued by the idea of buying Time Warner Cable, a
deal was not on its list of priorities until Charter put it in play
last summer. In the end, one of the sources said, all Charter did
was "wake up the sleeping beast."
John Paulson, whose Paulson & Co hedge fund is one of Time Warner
Cable's top 10 shareholders, said of Comcast in an interview with
Reuters: "They're gentlemen, old school businessmen. But they're
also aggressive."
Charter's next steps were not clear on Thursday. It had nominated a
slate of directors to replace the entire board of Time Warner Cable
on Tuesday, but was kept in the dark as its prize was slipping away
to another buyer.
Time Warner Cable CEO Marcus, in the job for just 44 days, said in
an interview that the deal, while good for his shareholders, is
bittersweet for him.
"I was looking forward to thousands of days, not tens of days doing
this job," Marcus said.
Still, the former Paul, Weiss, Rifkind, Wharton & Garrison LLP M&A
lawyer who over the past eight years had served in various roles at
Time Warner Cable, including its top dealmaker and chief operating
officer, just pulled off one of his largest deals ever. And thanks
to his tenure at the company, he could take home some $50 million
after it closes.
"Sometimes you don't have control over how things unfold," Marcus
said.
THE FINAL DAYS
Things moved quickly over the last 10 days, the sources said.
After months of pursuing Time Warner Cable without success and
speaking informally with Comcast last year, Charter approached
Comcast once again in the middle of January about teaming up.
The idea was for Charter to buy all of Time Warner Cable and later
sell off select systems to Comcast.
Comcast, with a $138 billion market value, dwarfs Charter's $13.43
billion, as well as Time Warner Cable's $40 billion market
capitalization as of Thursday.
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But as the two discussed options, Comcast became increasingly
uncomfortable with Charter's hostile approach and more skeptical
that Charter would be able to win Time Warner Cable's blessing with
its offer, the sources said.
Comcast also became increasingly excited about the prospect of
buying Time Warner Cable on its own.
Comcast felt that it could pay between $150 and $160 per share for
Time Warner Cable, the sources said.
Initially it was also willing to put cash along with stock into
the deal. But one of the sources said Time Warner Cable wanted an
all-stock deal and for Comcast to use the cash instead to initiate a
large share buyback program after the transaction closed to boost
the share price of the combined company.
That meant Time Warner Cable shareholders would end up owning 23
percent of the combined company and also not have to pay taxes as a
result of the transaction.
In return for paying the price, however, Roberts had one demand:
Comcast would not pay a reverse break-up fee, or the penalty that a
buyer pays to the seller if it fails to close a deal, typically
because of regulatory reasons, the sources said.
The request was unusual for a deal that was sure to face regulatory
scrutiny. A few years ago, for example, AT&T Inc agreed to pay as
much as $6 billion as reverse breakup fee, paid in cash and
spectrum, as part of its deal to buy T-Mobile USA from Deutsche
Telekom for $39 billion. The deal was shot down by regulators, and
AT&T had to pay the fees.
Some lawyers said such fees are rare in the cable industry, however.
"These businesses operate fairly independent enough and if this deal
does not get approved, there is not going to be that much damage to
Time Warner Cable," said Robert Townsend, co-chair of Morrison &
Foerster's global M&A practice.
Comcast CEO Roberts said he did not recall ever agreeing to a
reverse termination fee, not even in its $30 billion buyout of
majority of NBC Universal in 2009.
Time Warner Cable's board determined that the proposed transaction
should get regulatory approval because the companies do not operate
in the same markets, the sources said. They agreed to Comcast's
condition.
Talks were further aided by the fact that executives from the two
companies knew each other and were friendly, the sources said. They
also had worked together on a deal previously.
In 2006, the two split up bankrupt cable operator Adelphia
Communications in a complicated $17.6 billion transaction. Marcus
was Time Warner's lead negotiator on the deal at that time.
This time around, the two chief executives, along with Comcast Chief
Financial Officer Michael Angelakis and Time Warner Cable's Arthur
Minson, negotiated key points of the deal by phone as well as
in-person meetings in New York, without relying much on advisers.
The two sides agreed a final deal price of $158.82 per share on
Monday morning, and the board of each company approved the
transaction on Wednesday evening.
"Throughout the whole process with Charter, I consistently said one
thing — insufficient value. They didn't value the unique asset that
was Time Warner Cable," Marcus said. "On the simplest level, the TWC-Comcast
merger was superior."
(Additional reporting by Nicola Leske;
editing by Paritosh Bansal and Richard Chang)
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