Events: Deal Break Analysis
April 24, 2015
(CHTR pro forma for BHN and TWC mid-pt)
- NASDAQ: CHTR
- Recent PPS: $185.75
- Shares Out: 404.64 million
- Market Cap: $75,163
- Total Debt: $63,961
- Enterprise: $139,124
Discussion. That was quick. In less than a week, the TWC/CMCSA deal and associated transactions have been canceled, and CHTR is exploring a TWC bid. Given the speed at which CHTR is moving in to discuss a transaction, it appears a deal is highly likely to be consummated in some form. My original analysis assumed standalone CHTR took out TWC at a mid-point PPS of $152 – or 8X 2014 EBITDA – CHTR issued equity at a $170 PPS, and that the PF CHTR/TWC entity traded at 15X terminally, at which, CHTR would be worth $207.
Updated Assumptions. In addition to an overly-conservative CHTR issuance PPS assumption ($170) versus CHTR’s recent $185.75 closing PPS, I believe I underestimated what CHTR is likely willing to pay for the TWC asset. Standalone TWC will have upwards of $9B of capital return capacity (according to Jefferies); CHTR programming costs would step down to TWC’s rates; and PF CHTR/TWC would have ample opportunity to accretively divest adjoining properties. As such, I have increased the mid-point take-out estimate to 8.5X 2014 EBITDA, at which TWC would be worth $167. At 9X on the high side, TWC would trade for $182.
Two additional updates – I assume the Bright House Networks (BHN) transaction goes thru at the original multiple, but done on an all-debt basis (for the sake of modeling ease); and that the PF CHTR/TWC entity trades at 17.5X terminally. Given the more attractive ROIC profile of the broadband business, and the on-going rebalance toward BB-based cash flow generation, I believe the risk is to the upside with terminal valuation multiples.
P/FV. Utilizing the assumptions outlined above, PF CHTR/TWC is worth $248 and $235 in the mid- and high-case TWC take-out scenarios. At the respective PF CHTR/TWC fair values, TWC is worth $231 and $236. P/FV scenarios for CHTR and TWC are as follows:
- No Deal
- CHTR: 81% (CHTR PF for BHN transaction)
- TWC: 102% (Standalone TWC trades for 8X 2014 EBITDA)
- Mid-Point Take-Out
- CHTR: 75%
- TWC: 67%
- High-Point Take-Out
- CHTR: 79%
- TWC: 66%
Trade. In my opinion the no-deal scenario is functionally irrelevant, as its probability appears extremely low; and while the risk/reward appears skewed toward TWC in the mid-point scenario, a significantly higher cash component could close the gap.
TWC is most interesting to me as a hedge against an aggressive CHTR bid; as such, I would structure the trade as a simple 50-50 CHTR/TWC position.
TWC/CMCSA DEAL POST-MORTEM
- Justice and FCC spent a year analyzing legal, regulatory and engineering aspects of the deal
- Concerned with almost 30% share of video market, and ability to pay lower programming prices than competitors and/or negotiate exclusive deals that keeps programming off alternative services
- 57% share of the High Speed Broadband market (>=25 mbps), and associated internet “gatekeeper” position
- Several ways to throttle online video competition: programming contracts; control over set-top streaming boxes; and retail pricing