The Time Warner Cable Control Premium: $0

MarketWatch has a good summary of the rather complex deal by which Time Warner plans to spin off Time Warner Cable. But something here doesn't make a lot of sense to me. Time Warner currently own 84% of Time Warner Cable, much of that in the form of Class B shares carrying ten times the voting power of common stock. In other words, it should be able to receive a substantial control premium from someone - Cablevision being the obvious strategic fit.

Instead, Cablevision is messing around buying newspapers, while Time Warner is swapping its Time Warner Cable Class B shares one-for-one for regular Class A shares, which it will then distribute to its shareholders in some yet-to-be-determined manner. In other words, Time Warner seems to be trying as hard as it can to dismantle any ability it might have to garner a control premium for Time Warner Cable.

What's going on here? The most charitable explanation I can come up with is that Time Warner talked to a number of potential strategic and financial buyers, but that none of them showed much in the way of willingness or ability to come up with $10 billion in the present economic climate. The announcement of this deal is like an auctioneer's "fair warning": it's a way of saying "if you want control of this company, this really is your last chance to get it".

But I don't think Time Warner is bluffing; I think this deal really is going to go ahead as planned, and Time Warner will get no control premium at all for Time Warner Cable. Instead, it's loading up its subsidiary with debt, and taking out a $9.25 billion one-time dividend. Which is less than it seems at first glance, because Time Warner is also extending a $3.5 billion loan facility to Time Warner Cable.

The way this deal is structured, Time Warner looks as though it's hell-bent on maximizing the amount of cash it receives now, rather than maximizing the total amount of value inherent in its control of Time Warner Cable. Maybe that makes sense, if the $9.25 billion is going to help pay down some of Time Warner's expensive debt. But the whole thing seems much more boringly financial than compellingly strategic.