Charter Communications and Time Warner Cable have taken off their gloves in a battle for one of the country's largest cable networks. But investors should not lose sight of the muscle behind the scenes—media mogul John Malone.
After several months of private approaches, Charter Communications went public earlier this week with a $38 billion offer for TWC accompanied by a 29-page slide deck criticizing its ineffective strategies. TWC struck back Wednesday with a detailed presentation of its own, accusing Charter Communications of trying to steal the company with a bid below historical deal multiples.
Charter also remains on the hunt for ways to pad its offer. The company on Wednesday approached Comcast, which owns CNBC parent NBC Universal, asking if it wanted to purchase some of TWC's regional operations and subscribers, according to a person familiar with the matter. The person added that such a transaction could occur after Charter completes a deal of its own, but the talks remain "very early."
Notably quiet but another potential partner is Malone's Liberty Media, which owns 27 percent of Charter. Malone, an industry pioneer who once built TCI into a cable giant, has been a vocal advocate of cable consolidation and is effectively using his investment to bet on his thesis. Liberty hasn't committed to investing more money in Charter but views it as an option, according to a person familiar with the matter.
Such additional cash could come in handy very soon. Consider the current offer of $133.60 per share, which includes $82.54 in cash and the remainder in Charter shares. To get the deal done, Charter will probably need to get a bit closer to the $160 that TWC wants and increase the percentage of cash.
Unfortunately, the current offer will already give the combined company net debt of five times earnings before interest, taxes, depreciation and amortization. Investment bankers say Charter could probably borrow more money to sweeten its offer, even without Malone's participation.
But relying on much more leverage would be risky. Comcast, for instance, has leverage of about two times.
A better solution would be for Malone to purchase more Charter shares. That would allow Charter to increase the cash component of its offer and keep leverage at a reasonable level.
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But Malone isn't likely to back an aggressive bid for TWC. On the contrary, he is known for patience, particularly when there are no other obvious bidders. In 2010, for instance, investors bid up shares of entertainment company Live Nation in hopes of a better bid from Malone, only to see the shares tumble when it reported weak results.
Indeed, time is probably on Malone's side in the current standoff. Charter, which has been busy rolling out digital cable, will see revenue rise 8 percent in 2014 and 7 percent in 2015, according to consensus estimates. TWC, which has struggled to keep customers recently, is only expected to post a revenue increase of 3 percent in each of those years.
Certainly, Malone and other Charter investors are likely to take a hit if a deal doesn't materialize. Charter shares have risen about 20 percent since deal speculation began last summer, based partly on hopes for cost savings the company would realize by combining with TWC.
TWC probably has much more to lose. The company's shares have risen 44 percent since last summer while the company steadily reported soft results.
Ultimately, Charter will likely need to add lots of money to its offer. After all, many long-term TWC shareholders probably believe the company can set itself straight eventually. But with little improvement expected in the near term, and Malone unlikely to back a big sweetener, TWC shareholders could grow impatient quickly.
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UPDATED: This story was updated to note that Charter approached Comcast on Wednesday about becoming involved in a TWC deal.
—By CNBC's John Jannarone. Follow him on Twitter @jannarone.