Acquisition of Time Warner Cable
Rooshabh Shah
Boston University: AD714
Dr. John D. Sullivan
June 25, 2015
Table of Contents
ACQUISITION OF TIME WARNER CABLE
2
Industry Analysis
3
Company Background
4-5
Recommendations
6-9
Financing
9-11
Operations After the Acquisition of Time Warner Cable
11-12
References
13
Appendix
14-22
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Industry Analysis
The Media industry is involved in delivery of broad band data services and transmission
of signals. The industry is highly regulated increasing the risk of operating by the competitors.
The threat of new and substitute products is minimal due to over regulation of entry of new firms
and products in the market. Existence of few leading service providers has also led to reduced
bargaining power of suppliers and buyers. Nevertheless, the market rivalry and competition is
high as firms try to attract the high number of customers.
The growth in network of out of home cables has been high over years as depicted in the
graph depicted in Appendix J. Graph in Appendix J indicates that in spite of the high regulation
of the cable communications industry in US, the industry is recording growth enhancing the
viability of investments. Online video consumption has also recorded sharp gain enhancing the
overall gain in the industry as industry revenues increase. The high barriers of entry are to the
benefit of the companies but to the detriment of customers. When there is not strong competition
in an industry, players can easily exploit consumers. Nevertheless, this would be to their
advantage as they would realize high revenues.
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Charter Communications and Time Warner Cable are direct competitors of one another
within the same industry. These companies belong to the Communications Sector, Media
Industry, and Cable/Satellite sub-industry. From the Morningstar screenshot list of competitors
in Appendix A, we can take note of the industry being very competitive with many companies
competing within the industry. From the screenshot, Comcast is the market leader in this
industry with $152,857,000,000 in market capital. Charter Communications has market cap of
$18,873,000,000 and Time Warner Cable has a market cap of $49,822,000,000. Time Warner
Cable is rated as the second largest cable company. Both companies are considered to be under
the Large Cap category. Market cap determines the price of the company’s stock. Market
capitalization is very important for investors. It is used by investors to get an idea of their
potential investment risk. The larger the market cap, the lower the risk and lower return. This
smaller the market cap, the higher the risk along with higher returns.
Company Background: Time Warner Cable
“Time Warner Cable Inc., together with its subsidiaries, provides video, high-speed data,
and voice services in the United States” (Yahoo Finance). The company was founded in 1973 as
Warner Cable. After its merger with Time Inc.’s cable television company, the merged company
was named Time Warner Cable in 1990. Time Warner Cable is headquartered in New York City.
On 6/24/15, TWC stock closed at 176.93. Robert D. Marcus is the current Chairman and CEO.
As of year-end 2014, the company has 54,430 employees serving over 15 million customers.
Time Warner Cable operate in 29 states and has the following three main business segments:
Residential Services, Business Services, and Other Operations.
The Residential Services is managed under COO John H. Keib. This segment includes
the following services: video services (including video on demand, digital video recorder); high-
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speed data/communication services (email, PC security, parental controls, and online radio
services); and voice services that comprise unlimited calling in the United States, Canada, Puerto
Rico, and Mexico.
The Business Services segment focuses on data service such as Internet, networking
services, wholesale transport services, video services, and voice services. Voice services for
businesses include many options such as the following: call hunting, call forwarding, call
restrictions, and call transfer. Business services also operations its own IT solutions, cloud
services, managed network security web hosting, messaging solutions, and online backup.
The Other Operations segment consists of Time Warner Cable Media that sells video and
online advertising inventory; and regional sports networks, local sports, news, and lifestyle
channels. As of year-end 2014, the TWC served approximately 15.2 million residential and
business services customers.
Company Background: Charter Communications
“Charter Communications, Inc., through its subsidiaries, provides entertainment,
information, and communications solutions to residential and commercial customers in the
United States” (Yahoo Finance). Charter Communications was founded in 1999 and is
headquartered in Stamford, CT. On 6/24/15, CHTR stock closed at 168.48. The following is a
list of the company’s corporate governance: Thomas M. Rutledge (CEO), Christopher Winfrey
(CFO), John Bickham (COO), and Jonathan Hargis (CMO).
Charter Communications provides basic and digital video, premium channels, ondemand, pay-per-view, high definition television, and digital video recorder services, as well as
Charter TV App, which enables video customers to search and discover content on various
devices. Its Internet services, allows customers to create and run multiple e-mail addresses, as
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well as access to various entertainment, games, news, and sports content; and Charter Security
Suite, and parental control features. The company also provides a form of voice communication
through internet (VOIP), Internet access, business telephone services, data networking, and fiber
connectivity to cellular towers and office buildings for business and carrier organizations. As of
year-end 2014, Charter Communications had 23,200 employees serving 4.2 million residential
video customers; approximately 4.8 million residential Internet customers; approximately 2.4
million residential voice service customers; and approximately 619,000 commercial primary
service units.
Recommendations
It is advisable for Charter Communications to buy Time Warner Cable due to the current
financial health and expected growth rate of Time Warner Cable. In the next 10 years, the cash
flow of Time Warner is expected to grow with the constant rate of 10% per year. Similarly, cash
flows are expected to grow by 5% year after year. Considering the valuation of Time Warner
Cable, the NPV is positive at $54,648.30 million. This implies that the NPV was suitable to
support future success of the new acquired company. Since both companies are financially
healthy, Charter should expect sustainable and scalable financial growth after acquiring Time
Warner Cable. With the acquisition, Charter Communications will have a larger market cap in
the industry and become more competitive.
In terms of financial ratio analysis, the financial ratios are appropriate in determining
whether Charter Communications should buy Time Warner Cable. Full explanations of financial
ratios and calculations can be viewed in Appendix F. The profit margin for TWC is 8.9%
compared to CHTR at 0%. Current ratio for TWC is 0.52 compared to CHTR at 0.23. Debt ratio
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for TWC is 83.48% compared to CHTR at 99.4%. ROE for TWC is 25.34% compared to CHTR
at 0%. ROA for TWC is at 4.19% compared to CHTR at 0%.
Charter Communications should buy Time Warner Cable. Time Warner Cable has a
positive NPV value that is supported by future forecasts of growth in the total free cash flows in
the company. Considering the forecast changes, the annual cash flows for Time Warner Cable is
expected to grow by 10%. The examination of the NPV and financial ratios of Charter
Communications indicates that the company has not been performing well. This acquisition will
make both companies become better competitors in the industry. Moreover, there are many
synergies that will help the companies reduce costs and further their growth.
Time Warner has a dominant market share. The organization has over 23 magazines and
50 websites. This will develop a synergy to Charter Communications, by extending its market
share. The combined market share of both organizations will enhance the ability of the new
organization to influence industry forces including prices and decisions by regulators, to their
advantage (DePamphilis, 2011).
Time warner is highly dependent in Google Inc. as its main website search provider
(Marketing, 2015). The organization relies on Google’s algorithmic search in its programs. The
need to bring other organizations such as Charter Communications on board is necessary in
diversifying its supply networks.
Time Warner Cable will benefit from the unique ability of Charter Communications to
serve customers who requires advanced entertainment services as well as communications
(Marketing, 2015). This will accelerate Time Warner’s distribution process in Charter
Communication distribution channels and vice versa. The end result will be a synergetic
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improvement in the total company’s distribution process. Time Warner Cable will also enjoy the
delivery of its services to more than 2 Million customers of Charter Communications. This will
boost the overall sales that the organization would be generating as a merged company as
opposed to what it would be generating on its own.
Charter Communications has a very strong brand (MBA, 2015). Time Warner will take
advantage of the same in delivery of its services to customers. This will be critical in developing
strong relations of the organization and its customers. Satisfied customers are likely to act as
ambassadors to an organization in the market hence drawing more customers as well as repeat
purchases.
The combined operations of Time Warner Cable and Charter Communications will be
critical in boosting the efficiency of Charter Communications. One of the cited weaknesses of the
organization is low efficiency in utilization of bandwidth capacity (MBA, 2015). It records high
level of unused bandwidth capacity. However, with a larger customer base and better approach
of economies of scale, Charter Communications and Time Warner Cable will be able to offer
better bandwidth to customers at competitive pricing packages.
Culture is one of the key determinants of how well organizations engaging in acquisitions
will operate. There is a need for such organizations to have compatible culture and where such
compatibility does not exist, there is a need for them to craft a culture that is in line with the new
organization’s mission and vision. In this case, the culture of both organizations is largely the
same. Both organizations emphasize accommodation of diversity and team work. They also
promote a culture of innovation among employees. They will thus very critical in enhancing the
overall performance of the new organization. It is through culture that values of employees and
the organization, its traditions and stories are reflected. A common organization culture ensures
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that no stakeholders who feel left out as a result of how another stakeholder operate (Ferenczy,
Ilene, 2014).
From the points above, it is evident that the acquisition process should be carried out with
high level of diligence. There is a need for organizations to assess the internal capabilities and
weaknesses that they bring on table and how the combining of capabilities may boost the
performance of the organization while at the same time minimizing weaknesses. The above study
indicates that the media industry is highly regulated and is in an oligopolistic state. Consumers
and suppliers bargaining power is minimal. The threat of new entry is also minimal due to entry
regulations. It also indicates that both organization will benefit from common culture, enhance
utilization of broad band assets and take advantage of increased market share among others. All
these factors will enhance the overall performance of the organization.
Financing
As for funding of the acquisition, Charter Communications should offer to buy Time
Warner Cable for the net present value of $54,648.30 million. Charter Communications Inc‘s
acquisition of Time Warner Cable relies on the various forms of financing. Currently, Charter
Communications relies on the funding of John Malone, a private investor who owns 27% of the
total stake of the company. Additionally, loans including cash flows loans would be appropriate
for Charter Communications Inc in gaining advantage to acquire Time Warner Cable. These
loans are usually both short and long term, as they offer additional capital for successful
acquisition (Baker & Martin, 2011). This is because the loans offer adequate time and finances
for the integration of two companies. The loans also offer the benefits of reduced costs and
urgency of the financing.
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However, it is critical to understand the exposures of the company in determining the
appropriate merger and acquisition financing. One of the most recommendable type of loans is
bridge loan financing. Bridge loan financing is one of the most effective tools for immediate
capitalization of the acquisition. In most occasions, the loans are offered for short-term periods
within a range of 6 to 36 months. The bridge loan would help the company to take advantage of
the opportunity for acquisitions. In the short term, it is recommendable for Charter
Communications to take the bridge loans before organizing for long-term capital.
The investments of John Malone at Charter Communications are significant in the overall
funding of the company’s investment plans. John Malone’s support of the acquisition will
indicate the impacts of private equity investor funding that usually takes less time towards
funding the acquisition of the other company. The venture capitalists including John Malone are
beneficial, as they assist in immediate funding and quick implementation of acquisition
proposals. John Malone still holds a significant controlling interest in the company including
both the management and the operations of the business. Therefore, Charter Communications
should seek more venture capitalist and private investors willing to fund the acquisition of Time
Warner Cable due to the expected returns from the acquisition.
Considering the current debt level of Charter Communications, Mezzanine financing
would also be appropriate. This debt financing option will offer the company will increase
funding from the creditors who would be willing to convert their debt into equity. Even though
this financing option offers adequate funding, it experiences high interest rates. Most
importantly, Charter Communications should find the Mezzanine financing easier to obtain
compared to other financing options (Elsas, Flannery & Garfinkel, 2014). Charter
Communications has also associated the financing option with leveraged buyouts.
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In comparison with other forms of financing, it is necessary for Charter Communications
to consider Mezzanine financing for acquire Time Warner Cable. This is because the financing
allows debt to be treated as equity on the company’s statement of financial position. Such
treatment makes it easier to acquire standard bank financing. Charter Communications should
be ready to indicate its tract record with established products and services.
Charter Communications can issue debt in the bond market attracting investors to invest
for a competitive yield. Furthermore, Charter Communications can also buyout Time Warner
Cable for a dollar amount per share. For a combination of debt and equity financing, Charter
Communications should take into consideration the NPV of Time Warner Cable. Time Warner
Cable’s NPV is $54,648 million. Charter Communications should pay the NPV divided by the
amount of shares outstanding of Tim Warner Cable.
Operations After Acquisition of Time Warner Cable
After acquiring Time Warner Cable, Charter Communication will be a stronger
competitor in the Media industry. The following are areas in which Charter Communications
will benefit after the acquisition: larger market share, over-coming entry barriers, lower cost of
new product development, increased speed of deployment of new products/services to market,
reduced risk in developing a new product/service, potential for faster growth of customer base,
increased diversification, reduced costs due to synergies, and maximizing shareholder profits.
Though both Time Warner Cable and Charter Communications are in the similar kind of
business over the years and they have their own customer base for a longer period of time, it is
extremely difficult to say that, each company has similar presence across the entire locality and
because of which entering to that new opportunity market, it will have entry barriers. There
would be some locations, where Charter has a dense presence and Warner has never presence in
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those localities as well. So post the acquisition, Time Warner Cable will have the opportunity to
get more business. There will be a growth rate in customers switching over from other
companies to Charter Communications. The concept of entry barriers will be overcome by Time
Warner Cable with the existing market support from Charter Communications.
Although Time Warner Cable is present in this cable business for a longer period of time,
there are certain products of Charter Communications, which are new to Time Warner Cable. A
new product of Charter Communications being offered to an existing customer of Time Warner
Cable and meets the customer requirement, will certainly help the company to improve and
increase the business effectively over the time. So each and every new product that is developed
will have lesser cost of production as per this process.
The acquisition makes faster market penetration and gets more market for potential
business along with better capabilities by entering into new horizons from here onwards. Hence,
the called new capabilities could be used towards the new product development process and this
can create a better market position in the stiffer competitive market prevailing at present. As the
entire business is strongly established for Time Warner Cable, the concept of developing a new
product as per the requirement of the consumer is already there. The risk of the new product
failing is minimized.
After the acquisition, it is very easy to diversify the business scope and to acknowledge
the business opportunities to ensure that the risk of concentration is diluted to full extent possible
in the market by the company. Diversification of the product portfolio will help both companies
achieve a balanced growth while minimizing risk. After the acquisition, Time Warner Cable will
be a larger company with variety of services and products in the market. After the acquisition,
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Charter Communication can reduce some of its costs by lowering the total number of employees
or “doing more with less”.
References
Baker, H. K., & Martin, G. S. (2011). Capital structure and corporate financing decisions:
Theory, evidence, and practice (Vol. 15). New York, NY: John Wiley & Sons.
DePamphilis, D. (2011). Mergers, Acquisitions, and Other Restructuring Activities: An
Integrated Approach to Process, Tools, Cases, and Solutions. Burlington: Elsevier
Science.
Elsas, R., Flannery, M. J., & Garfinkel, J. A. (2014). Financing major investments: Information
about capital structure decisions. Review of Finance, 18(4), 1341-1386.
Ferenczy, Ilene. (2014). Employee Benefits in Mergers and Acquisitions, 2014-2015. Wolters
Kluwer Law and Business.
Fortune (2015). How the cable industry became a monopoly. Retrieved from
http://fortune.com/2015/05/19/cable-industry-becomes-a-monopoly/
Marketing (2015). The Warner SWOT. Retrieved from http://www.marketingteacher.com/timewarner-swot/
MBA (2015). Charter Communications. Retrieved from
http://www.mbaskool.com/brandguide/media-and-entertainment/6482-chartercommunications.html
NCTA (2015). Industry data. Retrieved from https://www.ncta.com/industry-data
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Appendix A: Source: www.morningstar.com
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Appendix B: Financial Statements for Charter Communications
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Appendix C: Financial Statements for Time Warner Cable
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Appendix D: Cash Flow Forecasting and NPV for Charter Communications
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Appendix E: Cash Flow Forecasting and NPV for Time Warner Cable
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Appendix F: Financial Ratios and Explanation
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1. Profit margin: This ratio evaluates the profitability of a company. It examines the ability of
the company to convert all the revenues into profits. For the fiscal year, Charter Communications
Inc was not able to generate any profits with Time Warner net income accounting for 8.9% of the
total revenues.
Profit Margin = net income/revenues
Time Warner Cable
= 2,031/22,812 = 0.089 or 8.9%
Charter Communications
= (183)/9,108=0
2. Current Ratio: This ratio is indicator of whether a firm has adequate current assets to pay for
its immediate liabilities. Both companies reported a current ratio below 1.0. This means that
both companies are unable to pay their current debts leading to unfavorable liquidity position.
However, Time Warner had a better current ratio at 0.52 compared to 0.23 of Charter
Communications.
Current ratio= current assets/current liabilities
Time Warner Cable
= 2316/4497= 0.52
Charter Communications
= 371/1635= 0.23
3. Debt Ratio: This financial ratio measures the level of company’s debt. Both companies have
unfavorable debt ratio with the debt accounting for more than 50%.
Time Warner Cable
= 40,488/48501= 83.48%
Charter Communications
= 24,404/24,550= 99.4%
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4. Return on Equity: This ratio measures the profits earned from the company’s investments in
terms of the firm’s stock. Charter Communications did not have any return on equity due to the
net income posted in the fiscal year. However, Timer Warner has a return on equity of 25.34%
that is acceptable for Charter Communications to consider it a better buy.
Time Warner Cable
= 2,031/8013= 25.34%
Charter Communications
= (183)/146=0
5. Return on Assets: This ratio examines the effectiveness of the company in using its assets to
generate profits for the company.
Time Warner Cable
=2,031/48501= 4.19%
Charter Communications
= (183)/24550=0
Appendix G: 6-month stock price movement for CHTR
Source: www.google.com/finance
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Appendix H: 6-month stock price movement comparison of TWC
Appendix I: 6-month stock price movement comparison of CHTR and TWC
Appendix J: Source: NCTA 2015
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