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Could Time Warner Cable Offer Charter a 'Pac Man' Bid?

NEW YORK (TheStreet) -- Maybe Charter Communications' (CHTR) bid for Time Warner Cable (TWC - Get Report) could take a twist that resembles a recent takeover drama between clothiers Men's Warehouse (MW) and Joseph A. Bank (JOBS).

Time Warner Cable has the ability to pull what's called a "Pac Man" defense where it offers to buy Charter Communications as a means to fend off a bid by the fledgling cable operator and its minority investor, John Malone-chaired Liberty Media, according to equity analysts at JPMorgan.

Currently, Charter Communications is offering Time Warner Cable about $130 a share in a cash and stock takeover transaction that could catapult the combined company to the top of the cable industry. Time Warner Cable, however, called Charter's heavily debt-financed bid risky and undervalued. The company also indicated it was willing to selling at $160 a share, a figure that would be hard for Charter Communications to reach.

Time Warner Cable, however, could shoot back at Charter Communications with a takeover plan as a means to either get the company to sweeten its bid or get the company off of its back, according to a Wednesday note from Philip Cusick of JPMorgan.

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"We believe that investors want cable consolidation as the scale benefits are well understood, but have so far been disappointed by the level of Charter's bid for Time Warner Cable," Cusick wrote.

"We also believe that Time Warner Cable's management team wants to continue to operate the company, but may be coming around to being more flexible than its recent $160 ask. To defend itself or drive a higher bid from Charter, TWC management could offer a 'Pac-Man' bid for Charter at the market level or a small premium," the analyst added.

In fact, a deal might make more sense with Time Warner Cable as the acquirer of Charter Communications, Cusick argues. Much of the operating and tax synergy that Charter is relying upon would also be present in a Time Warner Cable takeover of the company. Meanwhile, Time Warner Cable has the ability to offer Charter shareholders a solid premium for their stock without taking on too much debt.

Time Warner Cable shareholders might balk at such a deal because it would remove the takeover premium Charter Communications has put in the company's share price amid takeover efforts. Less leverage, however, could allow Time Warner Cable to keep its dividend in place.

On the surface, a Pac-Man defense would also underscore Time Warner Cable's qualms about selling to a far smaller and more levered competitor.

In a time where investors are willing to finance highly leveraged deals that rely on management guidance on synergy and tax savings, a Pac Man defense could also cool the animal spirits of Charter, a cable industry aggressor after emerging from bankruptcy a few years ago.

That is exactly what appears to be playing out in the possible consolidation of Men's Warehouse and Joseph A. Bank. At first, Joseph A. Bank attempted to buy Men's Warehouse, however, after a Pac Man defense, the tables have turned on a possible deal.

Other cable industry consolidation scenarios could also emerge.

Comcast (CMCSA - Get Report) has been reported as a possible dark horse bidder for Time Warner Cable. Reuters reported on Tuesday that the Philadelphia-based cable and media giant has hired Barclays and JPMorgan to advise it on a possible bid for Time Warner Cable or some of its assets.

-- Written by Antoine Gara in New York

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