NEW YORK (The Deal) -- Charter Communications (CHTR) CEO Tom Rutledge pitched his company's $61 billion offer for Time Warner Cable (TWC) directly to the target's shareholders, in a Tuesday, Jan. 14, conference call.
Rutledge and other executives expressed frustration over Time Warner Cable's reluctance to engage in talks, while also trashing the target's service quality, customer turnover and reputation in the marketplace.
"Before we take this process to the next step or walk away," Rutledge explained, the suitor decided to appeal to Time Warner Cable shareholders.
Charter executives urged Time Warner Cable investors to push their board to engage in talks, but also tried to temper expectations for a major bump in the price. The company's $132.50 per share bid reflects a negligible premium to recent trades. Time Warner Cable closed at $132.40 on Monday, before Charter announced the offer.
Time Warner Cable called the offer "grossly inadequate" and said it would be open to talking about a bid at $160 per share.
Charter CFO Chris Winfrey said Time Warner Cable's asking price is "well above what any rational market player" would expect and "far beyond" what Charter would pay.
Winfrey noted that Time Warner Cable's stock had risen 38% over roughly six months in anticipation of a bid from Charter.
Charter's offer includes $82.54 in cash and $49.96 in stock. Time Warner Cable would receive cash to cover the downside risk to the deal, and would have 45% of the equity in the post-merger company.
Shareholders of Charter needed a return that reflects the risk of turning around Time Warner Cable, he said.
"Since June, Time Warner Cable stock has traded higher, almost exclusively on rumors of a potential transaction," Winfrey said of the target's currency.
It may be true that merger speculation has boosted Time Warner Cable shares. On Tuesday, shares closed at $136 and climbed in after-hours trading.
Stifel, Nicolaus analyst Chris King said that the market assumes a final price of $145 to $150 per share.
"It's clear that the market doesn't expect the current offer to work," he said."The question is does Charter want to go to $150 or $160, and if not does somebody else come forward or does a consortium of cable companies come forward to make a joint bid."
If Comcast (CMCSA) were to get involved and Time Warner Cable were carved up, King suggested, the deal would receive greater scrutiny from the Federal Communications Commission and the U.S. Department of Justice.
Charter's presentation mentioned "opportunities for industry collaboration and geographic rationalization." Analysts asked if there could be other parties to the deal, or if Charter might have a partner.
"This is our bid, as Charter, for these assets," Rutledge said. "We are not aware of any other bidder, so our bid stands alone."
COO John Bickham said that Time Warner Cable had a "failed operating strategy" that resulted in industry-low customer satisfaction levels.
"Time Warner Cable has earned this poor reputation in two ways," he said.
First, Bickham said, the company has not been selling "high value products and services." Time Warner Cable balked at the spending needed to make its video network fulling digital, Bickham said. Analog networks have "clogged its network" and reduced its broadband speeds.
Second, he said Time Warner Cable had mismanaged a reorganization of its workforce as it evolved from a regional company to a nationwide organization. "Management never had a real vision of what this national organization should look like," he noted.
Charter reorganized its debts in bankruptcy protection in 2009.
When the company hired Rutledge from Cablevision Systems (CVC) in Dec. 2011, the move was seen as coup. Rutledge had a strong reputation as a manager. Charter has invested in converting markets to digital cable, which the company says it will complete in 2014.
When John Malone's Liberty Media (LMCA) invested $2.6 billion in Charter last year, it seemed to mark a new phase in the company's evolution. A larger role in M&A seemed likely, and Time Warner Cable emerged as the most likely target.
"The biggest risk in this whole business plan is time because of the rapid loss of customers that Time Warner Cable faces," he said, "which is why we've spent six months on it and we are asking the shareholders to get involved."
Rutledge echoed Bickham's criticisms of Time Warner Cable's network.
"Almost every one in the country has bought a flat screen digital TV in the last five years," he said. A majority of Time Warner Cable customers still have analog signals on their TVs, he added, "which looks quite poor."
Each side has made the argument that it doesn't need the other. Rutledge said that Charter could acquire "smaller and less-troubled assets," but did acknowledge that Time Warner Cable is the "biggest and best" target.
"We don't need any M&A for Charter to be successful," Rutledge said. "We don't need any asset heft to make Charter successful."
Time Warner Cable expressed confidence in its future as a stand-alone cable operator and said it would not let Charter "steal the company," in a press release late Tuesday.
"We have engaged with Charter," the company said, "but Charter is not prepared to pay for a one-of-a-kind asset that Tom Rutledge referred to today as the biggest and best M&A option available."