Monday, April 7, 2014

Comcast-Time Warner Cable Acquisition and The Whole Deal Concept

The Comcast (COM) Time Warner Cable (TWC) Acquisition illustrates the importance of looking beyond just price to the whole deal when evaluating M&A. As Ralph likes to note, you can name the price if I can name the other terms, and I will win every time. As such, this complements Ralph's Post on the Comcast-Time Warner transaction by focusing on the tradeoff between deal price and non price terms.

TWC had been pursued by Charter Communications (CC) for months resisting three unsolicited bids-the last being a cash and stock offer valued at $132.50 per share. This February, COM surfaced as a White Knight with an all stock deal then valued at $158.82 per share for a total of $45.2B. That price was close to the $160 mentioned by TWC’s management as full value. Since that announcement, COM’s stock price has dropped almost 10% reducing the per share price to $143.55 per share-just 8% above CC’s last bid.

The COM deal is a Fixed Exchange Ratio (FXR) offer-2.875 shares for each TWC share.TWC shareholders will own 23% of the combined firm. Under a FXR the number of shares is fixed, but their value, and hence the transaction’s value, is not determined until closing. The seller bears the risk of a drop in the buyer’s share price until that time. It can gain, however, should the buyer’s stock appreciate. FXR are more common, as opposed to floating exchange ratio structures.

TWC could have mitigated its COM price risk by negotiating for a Collar specifying a range around the initial value within which the price could move. Collars are used in 15-20% of FXR deals. Another interesting feature is the absence of a break-up fee from COM to TWC should the deal not receive anti-trust clearance-which is a real concern here given the size of the firms.  My observations are:

1)     TWC wanted to get as close as possible to its stated full value of $160 per share to distance           itself from CC’s “inadequate” $132.50 price.
2)     Collar and break-up features are valuable options. COM’s offer price would have been                   negatively impacted had TWC insisted upon these protective provisions.
3)     TWC willingly gave up the protection to achieve a higher nominal share price.
4)     TWC’s bet has not worked out and the deal may be endangered. COM is increasing the size of         its share repurchase from $3B to $5.5B post close to support its stock price. Who knows -  the         stock may actually increase in value before the close.

The bottom line is to focus on the whole deal when evaluating transactions. TWC and COM used non price features to help close a price gap. COM could top-up its bid by offering more shares and suffer the resulting dilution. This depends on how concerned COM is with losing the upcoming TWC shareholder approval of the deal due to its falling stock price.


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