S&P Report: Charter Communications Talks Merger With TWC Shareholders

Two days ago, Charter Communications

released a copy of its letter to Time Warner Cable

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.