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Exclusive: Liberty sees $700 million Charter-Time Warner Cable synergies - sources

A cable truck returns to a Time Warner Cable office in San Diego, California December 11, 2013. REUTERS/Mike Blake
A cable truck returns to a Time Warner Cable office in San Diego, California December 11, 2013. REUTERS/Mike Blake

By Soyoung Kim and Liana B. Baker

NEW YORK (Reuters) - Liberty Media Corp's top executives estimate that a merger between Charter Communications Inc and Time Warner Cable Inc could generate roughly $700 million in annual synergies, according to people close to the matter.

Liberty Chairman John Malone, who wants to use his 27 percent ownership in Charter to consolidate the cable industry, discussed the estimate when he, along with Chief Executive Greg Maffei, met with large Time Warner Cable shareholders in Denver last week, the people said.

Synergies from capital spending reductions, lower annual programming costs and other cuts in operating expenses are a key consideration for Time Warner Cable shareholders, as any takeover offer from Charter would include a large amount of its own stock.

However, Time Warner Cable, the subject of a months-long pursuit by Liberty and Charter, thinks any synergies from a merger would be much lower, at close to $500 million, other people familiar with the matter said.

The timing of Charter's expected cash and stock bid remains unclear, but it may be pushed into the new year given the upcoming holidays, people familiar with the matter said.

Charter had been preparing to send an offer letter as soon as this week, valuing the larger cable operator at below $135 per share, Reuters and others previously reported.

All the people asked not to be named because they were not authorized to speak with the media. Representatives for Liberty, Charter and Time Warner Cable declined to comment.

Charter has a market capitalization of around $13.6 billion, much smaller than Time Warner Cable's nearly $38 billion market value.

Depending on the cash and stock split of a deal, Time Warner Cable shareholders would end up with much of the combined company's equity, making the synergies a crucial element that would help them determine if a deal is attractive.

Craig Moffett, a research analyst at MoffettNathanson, estimated that synergies from a Charter-Time Warner Cable merger would total around $450 million annually -- far smaller than Liberty's own estimate.

"The synergies between the two, aside from programming expense, would likely be modest at best," Moffett said in a research note. "Even the fully realized programming savings are probably less than what most think."

He said the vast majority of the synergies would come from some $370 million in annual programming savings, but cautioned that getting bigger would not necessarily help the combined company receive better programming rates from media companies than Time Warner Cable already gets.

Barclays, meanwhile, recently estimated around $560 million of synergies from a transaction, mainly by lowering Charter's programming costs in line with that of Time Warner Cable.

However, one Time Warner Cable shareholder, who asked not to be named, said that there could be additional value from a merger with Charter, led by well-regarded cable executive Tom Rutledge, whose long career encompassed stints at Time Warner Cable and Cablevision Systems Corp.

"A lot of value will be created if one -- there's synergies and two -- you have the best operating executive in the mix. Tom Rutledge has done an excellent job," said the shareholder, who attended the meeting with Liberty. (Reporting by Soyoung Kim and Liana Baker in New York, additional reporting by Nicola Leske; editing by Andrew Hay)

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