Charter - Time Warner cable

Deal Details: 

On May 26, 2015, Charter Communications, Inc. (Nasdaq: CHTR) and Time Warner Cable Inc. (NYSE: TWC) announced that they have entered into a definitive agreement for Charter to merge with Time Warner Cable. The deal values Time Warner Cable at an enterprise value of $78.7 billion or equity value of $56.7 billion.

Premium:

• 18% over TWC's closing price of $166.55 on May 20th (or ~8.5bn) as the deal values TWC's share at ~$195.71 based on Charter’s market closing price on May 20 
• 29% over TWC's average price of 154.5 9 (or ~12.5bn) as the deal values TWC's share at ~$200 based on Charter’s 60-trading day volume weighted average price 

Announced synergies: 

$800 million annual run rate of cost savings expected
Cost synergies are expected from simple, uniform operating practices and pricing & packaging – designed to improve service, promote growth and create operating leverage. Combined purchasing, overhead, product development, engineering and IT will also generate opex and capex synergies.

The deal implies EV/2015 TWC estimated Adj. EBITDA = 8.3x adjusted for synergies and tax benefits.

My Bytes:

• Of the costs of Time Warner Cable as reported in 2014, announced synergies translate to about 13% of all operating costs
• Of the combined costs of Time Warner Cable and Charter Communication as reported in 2014, announced synergies translate to about 3% of all operating costs
• Synergies translates to an NPV of ~$5-6bn, much lesser than the premium paid

Other analysts views:
Analyst blog: Oracleofrommaha: Management have provided a very conservative guidance of $800 million in run-rate cost synergies. I think precedent cable M&A deals where scale efficiencies were sizable and obvious such as Liberty Global/Virgin Media and Liberty Global/Ziggo have demonstrated the massive potential upside in conservative synergy estimates. In both these cases, the actual synergies actually doubled the initial estimates. Overall, I project New Charter can potentially achieve ~$1.4B in full run-rate synergies out of the pro-forma operating cost base by 2019, or 75% higher than management’s initial estimates. 

References:

Charter - Time Warner - Investor Presentation
Charter - Time Warner - Press release