Shareholders cheered Tuesday's news that Time Warner Cable Inc.
and Charter Communications Inc. would combine, sending the shares
of both cable companies higher. But some Time Warner Cable
bondholders, wary of the debt load the combined company will
shoulder, were less enthusiastic.
Charter unveiled a roughly $55 billion agreement to acquire Time
Warner Cable for about $195 a share, as well as a separate purchase
of Bright House Networks LLC for $10.4 billion. In response, Time
Warner Cable shares jumped 7.3% to $183.60, while Charter's stock
rose 2.5% to $179.78.
Time Warner Cable bonds also rose sharply, but debt investors
said that largely reflected relief that Charter won out over
European telecommunications group Altice SA, which had been eyeing
Time Warner Cable and was viewed as potentially saddling it with
even more debt.
Time Warner Cable's 30-year bonds due in September 2042 rose
11.7% Tuesday to around 87.9 cents on the dollar, according to
MarketAxess. But they are still down about 16% from where they
traded before it became clear last month that Time Warner Cable's
prior agreement to sell itself to industry giant Comcast Corp. was
in serious peril.
The reason for bond investors' anxiety over Tuesday's deals:
They will cause debt to balloon from Time Warner Cable's current
level of about $23 billion to between $61.5 billion and $65.7
billion, depending on how much cash the company's investors choose
in the cash-and-stock deal. That increase reflects the companies'
existing debt and as much as $29.3 billion in new borrowings that
Charter says will help pay for the two takeovers.
Time Warner Cable's ratio of debt to last-12-months earnings
before interest, taxes, depreciation and amortization, or
Ebitda—a measure of cash flow—was 2.97 at the
end of March, according to Moody's Investors Service. Once the
three companies are combined, that ratio is expected to rise to
4.79–assuming Time Warner Cable investors opt for the
lowest amount of cash, or 5, if they opt for the most. Comcast's
debt-to-Ebitda ratio, meanwhile, was just 2.20.
Moody's rates Time Warner Cable Baa2, the second-lowest
investment-grade rating, and the transaction will likely push it
into "junk" territory, the ratings service said Tuesday. Moody's
placed Time Warner Cable bonds on review, following the
announcement and said they could end up with a rating two levels
lower, at Ba1, at the conclusion of the review. Standard &
Poor's, by contrast, said it thinks Time Warner Cable can maintain
its investment-grade rating.
Investors and analysts say the combined companies' debt could
become too burdensome if, for example, rivals aggressively price
bundles of cable-television and Internet services to lure customers
away, or if margins shrink.
"This seems like a deal that Charter was set on regardless of
the price, as long as the market would fund it for them," said
Matthew Duch, a portfolio manager at Calvert Investments Inc.,
which owns Time Warner Cable bonds.
When Charter was courting Time Warner Cable last year before the
Comcast deal, Time Warner Cable executives expressed concern over
the debt load a combined company would have.
But Time Warner Cable Chief Executive Rob Marcus said in an
interview Tuesday that the debt level of a combined Charter-Time
Warner Cable was only one factor that concerned Time Warner Cable
officials then. "This time around, I'm very comfortable with the
value delivered to TWC shareholders," he said. He added: "We
believe that we have structured this in such a way that the credit
rating of the Time Warner Cable bonds is either maintained or at
least the downgrade is mitigated as a result of the
transaction."
Moody's analyst Neil Begley, meanwhile, described the deals as
"a good outcome" for Time Warner Cable bondholders, who could have
faced an even larger potential downgrade if Charter hadn't made the
decision to secure those bonds against its own assets as well as
those of Time Warner Cable and Bright House. "The addition of
Bright House directors provides a conservative voice on the board,"
he added.
Shalini Ramachandran contributed to this article.
Write to Gillian Tan at gillian.tan@wsj.com
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