Two days ago, Charter
Communications CHTR released a copy of its letter to Time Warner Cable TWC
proposing discussions to merge the two companies, and outlining general
financial terms of the transaction. Charter also announced that because--in
its view--TWC did not intend to engage in merger discussions, it would bring
its merger proposal directly to TWC shareholders. On Jan. 14, Charter held a
follow-up conference call providing more specifics on the financial details of
its proposal along with its business rationale for the merger. Charter also
indicated that consummation of a merger would lead to significant changes in
the way the TWC cable assets are marketed and operated. Charter proposed total
consideration of $132.50 for each TWC share; $82.54 in cash and $49.96 in
Charter common stock. The company said it had negotiated sufficient funding
for the cash portion of its bid, including up to $24 billion in additional
debt.
On the heels of Charter's Jan. 13 announcement, TWC said that its board of
directors had unanimously rejected the Charter proposal. TWC did, however,
reiterate its openness to a transaction with Charter at the significantly
higher price of $160 per TWC share, with $100 in cash and $60 of Charter
common stock, and with price protection on those Charter shares.
Standard & Poor's Ratings Services discussed the potential ratings
implications of a merger of TWC and Charter in its "Credit FAQ: What Would Be
The Credit Impact Of An Acquisition Of Time Warner Cable By Charter
Communications?" (published Dec. 10, 2013, prior to the Charter offer). That
FAQ provided some guidance on the hypothetical ratings impact of such a deal.
We assumed Charter would pay cash consideration of around $90 per TWC share,
to be funded through the incurrence of about $25 billion of debt. Based on
those assumptions, we said the corporate credit rating of the merged entity
would likely be either 'BB-' or 'BB', depending on whether we viewed the
merged company's business risk profile as, respectively, "satisfactory" or
"strong." Charter's current bid to buy TWC, and its financing plans, are
generally in line with the assumptions we used in our FAQ. Accordingly, we
reiterate our expectation that the corporate credit rating on the merged
company would likely be 'BB-' or 'BB' under Charter's current proposal.
However, the ratings could be lower if the actual merger entailed a materially
higher, debt-financed cash component.
Ratings on individual debt issues that survive a merger could be one or two
notches above or below the prospective corporate credit rating, depending on
recovery prospects for those issues.
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