Fitch: Possible Time Warner/Charter Deal Likely Credit Negative

A potential merger agreement between Charter Communications, Inc. (CHTR) and Time Warner Cable, Inc. (TWC) would likely have negative rating implications for both companies, according to Fitch Ratings. However, placement of ratings on Rating Watch Negative is predicated on the parties reaching a definitive merger agreement.

TWC's board of directors unanimously rejected CHTR's most recent informal cash and stock offer of $132.50 per share, setting the stage for a more public negotiation, which could potentially lead to a change in the price or consideration mix. CHTR's proposal pegs TWC's enterprise value at approximately $61.3 billion, according to Fitch's estimates. The offer includes $82.54 per share in cash and the remaining balance in CHTR common stock, translating into a cash requirement of approximately $23.3 billion (excluding any potential cash contribution from Liberty Media).

Assuming CHTR debt finances its entire cash requirement related to its proposal, Fitch believes the pro forma debt of the combined entity would approximate $62.6 billion, translating to pro forma leverage of 5.8x before consideration of any potential cost or operating synergies (based on data as of Sept. 30, 2013). Absent any structural considerations, the pro forma credit profile of the combined entity is substantially weaker than TWC's current profile, which would likely lead to a multinotch downgrade of TWC's current 'BBB' Issuer Default Rating (IDR) and senior unsecured debt rating.

To the extent CHTR's balance sheet is used as a potential source of debt financing to support the transaction, Fitch previously indicated that negative rating actions would likely coincide with a transaction that increases leverage beyond 5.5x in the absence of a credible deleveraging plan.

Additional rating considerations, including, but not limited to, financial strategy and capital structure policy, operating strategy and expectations, and execution risks will weigh on any potential rating action.

TWC has approximately $25 billion of debt outstanding as of Sept. 30, 2013. TWC currently holds a 'BBB' IDR with a Stable rating outlook. CHTR has approximately $14.3 billion of debt outstanding as of Sept. 30, 2013. Fitch maintains a 'BB-' IDR for Charter Communications Operating, LLC, a 'BB+' senior secured issue rating and a 'BB-' senior unsecured issue rating.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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