Needham & Co. media analyst Laura Martin lowered her rating on Time Warner Cable to “underperform” Monday, adding in a note to clients that pressures from Title II regulations could affect its broadband business.
Martin wrote that Title II brings valuation risks including increased legal costs (TWC is likely to sue along with other cable companies to block the regulation); a higher discount rate for the stock price given the uncertainty of free cash flow streams as a result of higher taxes, price regulation or universal service fees; a lower terminal multiple given Federal Communications Commission chairman Tom Wheeler has said over time either new competition has to enter the market to drive down prices or the agency will intervene to assure all consumers have access to broadband.
“By implication, risk is rising that ROICs on broadband will be less profitable over the next 10 years than the past 10 years when only economics determined investment levels,” Martin wrote. “We calculate that the value of TWC falls 10-20% assuming Title II is upheld by the courts.”
Martin also warned that if the Comcast merger is not completed, Charter Communications, which had pursued TWC before Comcast trumped its $132.50 per share bid in February, will probably make a lower offer in the next go round.
Time Warner Cable stack was unaffected at least in early trading Monday – its shares were up 63 cents (0.4%) each to $154.68 per share at about 10:43 a.m.