JSI Capital Advisors - The Monitor

U.S. cable provider Charter Communications (NASDAQ: CHTR) announced on Sunday, May 26^th that it had reached an agreement to merge with one of its competitors, Time Warner Cable (NYSE: TWC) in a deal worth approximately $78.7 billion. The deal marks Charter’s second major acquisition in the last few months, when the firm announced on March 31^st that it had acquired over an 80 percent stake in Bright House Networks.

Valuation Analysis and Deal Metrics

Transaction Facts

Charter Communications announced on May 26, 2015 that is was merging with cable competitor Time Warner Cable for approximately $195.71 per share.
Charter will fund the deal primarily through equity, along with new and existing debt, as well as cash.
The transaction has an equity value of approximately $56.7 billion.
Expected to close by the end of 2015.
The deal includes a $2.0 billion breakup fee.

Strategic Considerations

Transaction is expected to generate approximately $800.0 million in cost synergies.
Transaction may give Charter more leverage in negotiating contracts with programmers.
Transaction significantly improves opportunities for Wi-Fi service offerings.
Including Bright House and Time Warner Cable, Charter’s 2014 pro forma revenue would have increased from $9.1 billion to $35.7 billion.
Transaction makes it so that Charter is able to compete with the heavy competition amongst the top cable companies in the video marketplace, which as of now includes Comcast, Dish, and DirecTV & AT&T (deal awaiting approval).

JSICA's Take

Charter-TWC transaction, when compared to some of the priced transactions in this industry since the beginning of 2012, comes in relatively in line with those multiples.
The average EV/LTM Revenue for priced transactions since 2012 was approximately 3.2x, compared to 3.4x in this transaction.
The average EV/LTM OIBDA for priced transactions since 2012 was about 8.6x, compared to 9.3x in this transaction.
Compared to last year’s proposed Comcast-TWC deal that was terminated, Charter paid 0.2x more EV/LTM Revenue and 0.5x more EV/LTM OIBDA to merge with Time Warner.
The deal seems to be much more attractive financially when compared to the recent cable deal in which Altice (AMS:ATC) agreed to acquire 70% of U.S. cable company, Suddenlink, which came in at roughly 3.9x EV/LTM Revenue and 10.0x EV/TTM OIBDA.

Currently, the FCC is looking into this transaction to determine how American consumers would benefit as a result of this merger, if it were to be approved.