Charter Communications Inc. CHTR 0.00% is nearing an agreement with banks to borrow money for a bid for Time Warner Cable Inc., according to people familiar with the situation—a sign that the scrappy cable operator's effort to engineer a combination of the two companies may be moving into high gear.
Charter has held talks with Bank of America Corp. BAC +2.97% , BarclaysBARC.LN +0.06% PLC and Deutsche Bank AG about a multi-billion dollar debt package that would underpin an offer for Time Warner Cable, which has a market capitalization of nearly $35 billion, the people said. Another possible source of cash for a bid, according to people familiar with the matter: sovereign wealth funds and wealthy individuals. Arranging equity commitments from such parties could allow Charter to increase the cash component of the deal without taking on too much debt.
It isn't clear which banks ultimately might participate in any debt package or how much Charter would get from lenders. There also is no guarantee a Charter bid for Time Warner Cable will ultimately materialize, and the timing of any such move is unclear.
A merger of Time Warner Cable and Charter could spark a fresh wave of consolidation in the cable-TV industry, which has been steadily losing television subscribers to satellite operators and phone companies and faces new threats from online video.
Charter is backed in the effort by Liberty Media Corp. LMCA +0.58% , its largest shareholder. Liberty Media Chairman John Malone, a pioneer of the cable industry who helped lead an earlier wave of mergers in the 1990s, has been the leading voice in the industry calling for consolidation.
He and others close to him have said that cable consolidation would help the industry deal with rising programming costs, a growing cause of concern for pay-TV providers. And by holding down their costs, cable operators could be better able to convince consumers to stop "cutting the cord" and disconnecting from pay TV.
News of Charter's interest in Time Warner Cable first surfaced in June, after Liberty Media Chief Executive Greg Maffei met with Time Warner Cable CEO Glenn Britt and floated the idea of a combination, people familiar with the matter said at the time. Mr. Britt responded that Time Warner Cable wasn't interested in such a deal, one of the people said. Since then, Time Warner Cable executives have publicly made clear that they won't agree to any deal that doesn't adequately compensate the company's shareholders.
For Charter, the difficulty in pulling off such a deal stems largely from its size; the company is much smaller than Time Warner Cable, with a market value of just $13 billion. Founded in 1993, Charter, based in Stamford, Conn., is the fourth-largest cable operator in the U.S., with 4.2 million video customers as of September, compared with 11.4 million for Time Warner Cable, the second-biggest.
Even so, several big Time Warner Cable investors have said they are frustrated with management. The company's operational performance in recent quarters has lagged behind that of peers including Comcast Corp. CMCSA +1.28% In the most recent quarter, for instance, the company lost subscribers in both television and Internet-access. While cable operators generally are losing TV subscribers, Internet-access has been an area of growth for most.
Charter and Liberty Media are putting pressure on Time Warner Cable at a time of transition in top management. Mr. Britt is retiring at the end of December, to be succeeded by his No. 2, Rob Marcus. Unlike Charter's CEO, Tom Rutledge, who rose through the operating side of the cable industry, Mr. Marcus primarily has financial and deal experience.
Mr. Britt said on a conference call with analysts at the end of October that his thinking on mergers has been shaped by two big mergers of the past, Time Inc.'s merger with Warner Communications in 1990 and AOL's combination with Time Warner a decade later. Both, he said, "were very lopsided in favor of one set of shareholders." He added that "our job is to make money for our owners, and [in] M&A, we are open to deals that do exactly that."
Time Warner Cable stock now trades at around $121, and investors would be looking for a premium. The cash component also is crucial. Some Time Warner Cable investors have said they would want about $90 for the cash component of any deal—around the price where Time Warner Cable shares hovered before the possible deal came to light. At $90 a share, Charter would need to raise roughly $25 billion for the cash component.
Barclays analysts in June estimated a Charter-Time Warner Cable combination could involve an incremental debt component of as much as $16 billion.
Besides bank debt, Charter would be expected to use existing Liberty Media and Charter resources, including Charter shares—in addition to the possibility of raising equity from outsiders.
Liberty Media would likely put cash into the deal to counteract dilution of its 27% stake in Charter from any Charter stock issued.
Liberty Media has recently raised $1.5 billion by selling new debt and a small portion of its stake in Sirius XM Radio. At an investor presentation in October, Mr. Malone said it was important for Liberty Media to keep its Charter interest at or above 25%, noting that "we would be prepared to make incremental investments to support what would otherwise be a diluting transaction."
According to a person familiar with the matter, a number of funds and individuals, some of whom have dabbled in cable in the past, have expressed a willingness to invest in a combination of Charter and Time Warner Cable.
It is possible Charter would ultimately decline to tap them, this person added. Any amount it raises in outside equity would be less than $10 billion, two of the people said.
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