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Cox Communications is considering jumping into the bidding for Time Warner Cable Inc.,TWC +3.95% according to people familiar with the situation, the latest twist in a fast-evolving takeover battle for the second-largest U.S. cable operator.
Atlanta-based Cox is the nation's third-biggest cable operator, with about 4.5 million TV subscribers, ranking slightly ahead of Charter Communications, CHTR +1.36% which was the first company to begin circling Time Warner Cable earlier this year. Charter is backed by John Malone's Liberty Media Corp. LMCA +1.95%
Comcast Corp. CMCSA -0.26% , the largest cable operator, also is contemplating a Time Warner Cable bid, either on its own or by backing a bid by Charter, people familiar with the situation have said.
The frenzy of deal interest comes as cable companies are trying to get bigger to deal with the industry's challenges, which include the rising costs of TV programming supplied by cable and broadcast networks. Mr. Malone, for instance, has suggested that a smaller group of big industry players could collaborate better to tackle common problems, like developing a better online-video strategy than the scattershot approach cable operators are taking now.
In the past, Cox, a unit of closely held media company Cox Enterprises, was viewed as a potential acquisition candidate. But the company has made plain it isn't for sale. Instead, it is looking for growth opportunities, said a person familiar with the situation. It isn't clear whether there have been any talks so far.
Time Warner Cable has been cool to Charter's advances. But it has approached Comcast about a deal, in hopes of heading off Charter, and would be likely receptive to a Cox overture as well, said a person familiar with the matter.
Analysts said Cox, which has a stronger balance sheet than Charter, may be in a good position to pursue a deal. "In some ways they make perfect sense as a white knight," said Craig Moffett, an analyst at MoffettNathanson, said.
Cox has maintained "conservative credit metrics" in recent years, including a ratio of debt to earnings before interest, taxes, depreciation and amortization of about 2.7, according to Moody's Investor Services, compared with 3.2 for Time Warner Cable and 5.5 for Charter.
In a July report, Moody's analyst Neil Begley suggested a combination of Cox and Time Warner Cable would be a "winning scenario for both companies" and bondholders of Time Warner Cable. The two companies could do a stock-swap merger, in which the family that controls Cox would emerge with about a third of the combined enterprise. Within a few years, assuming Time Warner Cable maintains its current pace of stock buybacks, the family could raise their ownership stake to a majority, Mr. Begley said.
One potential complication for buyers is that Time Warner Cable is looking for a premium to its share price, which has jumped more than 35% since June, when reports first surfaced that it was a takeover target. Time Warner Cable shares were up 4% in 4 p.m. trading Tuesday after The Wall Street Journal reported Cox's interest.
"You're talking about a very rich price based on the assumption that you can simply run Time Warner Cable better than current management," Mr. Moffett said.
A person familiar with the situation said Comcast still has the "flexibility to do nothing," and said no "specific transaction" is under discussion. Comcast's board generally believes consolidation would be good for the industry, whether or not Comcast participates in it, the person said. Comcast board members may get an update when they meet the second week of December, their first formal session this fall, the person said.
One option Comcast has contemplated is backing a Charter bid. A person familiar with the situation said Charter and Liberty were willing to explore any option to work with Comcast, which would otherwise be a rival to their ambitions. Still, a joint bid could be cumbersome, another person familiar with the situation said. One possibility is for Comcast to contribute money to a Charter bid at a level that is small enough to avoid regulatory scrutiny.
If potential buyers aren't able to persuade Time Warner Cable's management to sell, there is the possibility that some of the cable company's investors could agitate for a deal and mount a proxy fight to replace the board. There's been no such activism yet. If it materializes, such a campaign would likely ramp up in February, when nominations need to be submitted election to the board at the annual meeting in the spring, people familiar with the situation said.
A few investors that have taken activist stances in the past have been buying shares in Time Warner Cable, but none have indicated their intentions or called on management to take any action. Hedge fund Paulson & Co. has acquired four million shares of the cable company, building a stake of 1.4% as of Sept. 30, according to a securities filing. News of Paulson's investment was reported earlier by The Street.com.
The hedge fund is led by John Paulson, who has long invested in situations in which a deal is either already signed or regularly speculated about, a practice known as merger arbitrage. He built his stake in Time Warner Cable during a period when reports were surfacing of Charter's interest in a deal.
While Mr. Paulson isn't a typical activist investor, he has agitated on some deals. Earlier this year he said he would vote against the acquisition of MetroPCS Communications Inc. by Deutsche Telekom AG DTE.XE +0.30% 's T-Mobile US Inc. T-Mobile eventually restructured the deal, and Mr. Paulson backed it.
A Paulson & Co. spokeswoman declined to comment.
Glenview Capital Management LLC and Highfields Capital Management LP are other investment funds among the 25 biggest Time Warner Cable shareholders that have in the past selectively picked activist fights, though they aren't considered particularly active investors.
Both funds declined to comment.
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