Moody’s might lower Time Warner

Moody's Investors Service said it placed Time Warner Cable, Inc.'s Baa2 senior unsecured and Prime-2 commercial paper ratings on review for downgrade.

The review was prompted by Charter Communications, Inc.'s (Ba3 corporate family rating, on review for upgrade) announcement to acquire Time Warner for $200 per share in a cash-and-stock transaction. Charter's offer price represents an enterprise value of roughly $80 billion, consisting of $58 billion of equity plus net debt (debt less cash and short-term investments) of $22 billion. The total consideration for Time Warner is comprised of $100 per share in cash and $100 in stock, representing a 17% premium over Time Warner’s closing share price of $171.8 on May 22.

Concurrently, Charter also announced its plans to acquire Bright House Networks for $10.4 billion, comprised of $2 billion in cash, $2.5 billion of convertible preferred partnership units, and $5.9 billion of common partnership units.

Moody’s said the review for downgrade reflects its intention to merge with a lower-rated and more leveraged entity, which given the financing plans which include a significant debt component, will lead to deterioration in the newly combined Time Warner, Charter and Bright House's balance sheet strength and credit metrics to a level not consistent with a family investment grade rating.

The agency estimates that the deal could leave the combined entity with a debt burden (gross unadjusted debt) in excess of $60 billion and pro-forma debt-to-EBITDA (incorporating Moody's standard adjustments) of approximately 4.5 times, compared to Time Warner’s current outstanding gross debt of $23 billion and adjusted leverage of 3 times.

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