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Entrance strategy

10 Feb 2014 By Jeffrey Goldfarb

Tom Rutledge seems like a man on a mission. The U.S. cable operator he runs, Charter Communications, is preparing a slate of replacement directors for larger rival Time Warner Cable, the target of his $60 billion hostile bid. He may also have roped in Comcast to alleviate financial worries about the plan to take over his former employer.

Almost a year ago, Rutledge gained the backing of cable magnate John Malone, whose Liberty Media bought a 27 percent stake in Charter. Not long after, Charter made its first approach to Time Warner Cable. The company’s latest bid, at $132.50 a share, falls short of the $160 headline valuation demanded by Rob Marcus, the target’s chief executive.

The resistance has only emboldened Rutledge, who was once a candidate to lead Time Warner Cable but lost out to an internal rival. He is now on the verge of proposing 13 new members to his quarry’s board. Comcast may also be willing to buy a big slug of Time Warner Cable’s systems from Charter, which would help Rutledge pay for the deal and make the combined company financially stronger.

Without the help, and at the currently proposed price, Charter would need to borrow about $25 billion. Add that to the $38 billion of net debt the two companies already carry and it would equate to about 5.6 times their combined expected EBITDA, before any synergies. Assume Comcast buys 20 percent of Time Warner Cable’s operating earnings for 20 percent of the purchase price in cash. Then, even at a sweetened $150-a-share price, the leverage multiple would shrink toward a more manageable five times.

Rutledge’s maneuvers are keeping Time Warner Cable on the defensive, but they’re not certain to succeed. As Air Products and Chemicals can attest, infiltrating the boardroom of a target company doesn’t guarantee a deal. The three directors it managed to install at Airgas in 2010 wound up siding with their new colleagues and eventually thwarted the Air Products bid.

Comcast also might face regulatory challenges if it added to its network, meaning Charter could be forced to bear that risk in the form of a hefty break fee payable to Time Warner Cable if it pulled out of a deal. For now, though, Rutledge is proving adept at methodically marshaling forces against the company where he used to work.


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