Time Warner Cable mimics an Airgas negotiating move

By Nicola Leske, Soyoung Kim and Michael Erman

NEW YORK (Reuters) - Time Warner Cable (NYS:TWC) is borrowing a tactic from a three-year-old takeover battle as it seeks to fend off Charter Communications Inc's (NSQ:CHTR) $37.3 billion (22.5 billion pounds) unsolicited bid.

Time Warner Cable, by publicly naming the price at which it would reconsider its firm opposition to Charter's takeover bid, is following the example of Airgas Inc (NYS:ARG), which successfully repelled Air Products and Chemicals Inc (NYS:APD) in 2011 by putting forth a high number for the suitor to reach.

In the earlier case, the industrial-gas supplier responded to a $70 (42.25 pounds) per share offer from its rival by saying it would not sell for less than $78 per share. Air Products walked away.

Similarly, Time Warner Cable is saying no to the current offer, but not never to any deal. While rejecting Charter's $132.50 per share bid as too low last week, the company simultaneously said it would be willing to accept a bid at $160 per share.

Time Warner Cable has put itself in a strong early position by suggesting an immediate counteroffer, deal lawyers and other people watching the situation closely say. The price immediately sets market expectations higher and forces Charter to make the next move.

"That's given Time Warner Cable some standing, to say that we're not just digging in our heels. We're defending you, our shareholders, from an inadequate offer," said a top mergers and acquisitions lawyer who asked not to be named because he was not authorized to speak with the media.

The cable provider's lack of interest in a bid below what it cited leaves Charter with the option of raising its offer to get a deal done on a friendly basis or nominating a slate of directors to Time Warner Cable's board in order to launch a tender offer.

WEAKER DEFENSE

Still, there is one key difference between the defense of Time Warner Cable and Airgas: The chemical company elects only a minority of its board each year. Even with shareholder support, an unsolicited bidder would have needed at least two years to gain the majority position necessary to force a deal through - too long for most bidders to stomach.

All of Time Warner Cable's directors stand for election every year, so Charter could conceivably try to sell the merits of a deal below $160 a share to Time Warner Cable shareholders.

"Even if a majority of (Airgas) stockholders wanted to tender in favour, they couldn't force Air Products to hang around long enough," said Brian Quinn, an associate professor at Boston College Law School. "Time Warner can't do that ... because if Charter runs a proxy contest, it can replace the entire board."

Time Warner Cable's shares are trading at around $135, above Charter's offer and indicating investors expect the bidding to go higher. A number of large shareholders would not support the current price but are open to a deal if Charter sweetens its bid to the $145 to $150 per share range, Reuters reported last week.

Most investors expect any sweetener from Charter will fall short of Time Warner Cable's asking price, raising the spectre of a proxy battle. Charter has until February 15 to nominate a slate of directors if it wants to go that route.

Time Warner would then have to pitch its $160 a share target not to Charter but to shareholders. Of course any new board that resulted from a proxy fight would not necessarily vote differently from the old board.

Air Products managed to add three directors to Airgas' board, only to see those directors side with Airgas. All directors must act in the best interests of the company and would be mindful of potential legal challenges, deal lawyers say.

"That slate does have duties to all shareholders and would have to be comfortable in its own right that the deal is a good one," said Patrick Quick, partner at Milwaukee-based law firm Foley & Lardner.

If Time Warner Cable can make a compelling case for its holdout bid, "they can withstand almost anything from Malone - other than him hitting their number," said the M&A lawyer, referring to John Malone, chairman of Liberty Media Corp (LMCA.O).

Malone is trying to use Liberty's 27 percent stake in Charter to consolidate the U.S. cable industry.

RATIONALE FOR $160

Time Warner Cable has argued that $160 per share is in line with the valuations of other recent cable deals.

According to the cable company's presentation last week, Charter is only offering to pay 7.2 times estimated forward earnings before interest, tax, depreciation and amortization (EBITDA). Time Warner Cable says that every other large cable company bought in the last four years commanded values of 8 times forward EBITDA or higher. Its own counteroffer represents 8.2 times.

When Liberty bought 27 percent of Charter in March, it paid a price representing about 8.6 times forward EBITDA, according to Time Warner Cable. Just a month before the Liberty deal, Charter itself paid $1.6 billion for small cable operator Bresnan at about 8 times.

Because Time Warner Cable, the second-largest U.S. cable operator after Comcast Corp (NSQ:CMCSA), considers itself the biggest and best M&A option available, it believes it should command more, not less. Other companies, such as Cox Communications and Cablevision Systems Corp (NYS:CVC), are smaller and remain family-controlled.

Some board members had argued for demanding a higher price from Charter, according to people close to the matter.

By putting forward a high counteroffer so early, the company could be trying to show that Charter is hoping to buy Time Warner on the cheap.

"A lot of time when the targets don't counter or put that number on the table - and frankly, they rarely do - then there's an argument you have a bidder: 'Oh, look at these guys, they're not willing to do anything,'" said a second corporate lawyer, who asked not to be named because of potential conflicts. "Putting a counter out is a big frigging negotiating move. They are empowered when they do that."

Charter has argued that Time Warner Cable's EBITDA valuation does not necessarily apply here because unlike other previous cable deals, their offer is in cash and stock, providing potential upside to Time Warner Cable investors who would own roughly 45 percent of the merged company.

(Reporting by Nicola Leske, Soyoung Kim, Michael Erman and Liana Baker in New York; Editing by Christian Plumb and Prudence Crowther)