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Focus on the Time Warner Cable–Comcast material adverse clause

Must-know: Analyzing the Time Warner Cable–Comcast deal (Part 6 of 11)

(Continued from Part 5)

The material adverse change clause, or MAC

The MAC clause is one of the first thing arbs look at. For this deal, it lays out the circumstances under which Comcast (CMCSA) can back out of its deal with Time Warner Cable (TWC). Let’s take a look at the specific conditions that could stop this deal.

Note: I’ve paraphrased the MAC clause to limit the legalese. But you should read and understand the actual language in the merger agreement.

The MAC clause, paraphrased

The “ Company Material Adverse Effect ” means something bad happens to the Time Warner Cable that materially affects the business, or balance sheet of Time Warner Cable, except for the following:

  • Changes in the financial or securities markets, or general economic, or political conditions in the United States—provided they don’t have a disproportionate effect on Time Warner Cable. In other words, the financial crisis of 2008 wouldn’t be a MAC because it affected everyone and not just Time Warner Cable.

  • Changes in law or business conditions—provided they don’t have a disproportionate effect on Time Warner Cable. In other words, if the Feds decided to impose a surtax on cable TV companies that affects all cable TV providers, it isn’t a MAC.

  • Acts of God—war, hurricanes, et cetera—provided they don’t disproportionately affect Time Warner Cable. A hurricane that hits New York City is a MAC. A war in the Middle East is not.

  • The announcement or consummation of the transactions contemplated by the agreement. This means if a bunch of customers leave Time Warner Cable because they don’t want to be Comcast customers, that isn’t a MAC.

  • Any failure by the company and its subsidiaries to meet any internal or published budgets, projections, forecasts, or predictions—provided the reason for the miss is fair game. In other words, if Time Warner reports earnings below analyst estimates and the stock tanks, the fact the stock tanked is not a MAC. But the reason why they missed earnings could be considered.

So, if something bad happens that affects the value of Time Warner Cable and makes it worth less than it was when Comcast initiated the transaction, Comcast can break the deal—provided the reason doesn’t fall into one of these carve-outs.

Other important mergers

Other important merger spreads you should consider include the Covidien (COV) and Medtronic (MDT) deal as well as the DIRECTV (DTV) and AT&T (T) deal.

Continue to Part 7

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