Charter stock soared more than 6% on Monday after reports surfaced that the Connecticut cable operator was in talks to purchase about 3-to-5 million subscribers from Comcast and Time Warner Cable.
Charter stock rose as high as $125.07 per share on Monday, up $7.23 each (6%). The shares closed at $123.61, up 5% or $5.78 each.. Time Warner Cable and Comcast shares were relatively unchanged Monday – both stocks were up about 1% each.
Comcast has said publicly that it would divest about 3 million subscribers if needed to gain regulatory approval of its $69 billion deal to acquire Time Warner Cable. The company has not identified which markets it would sell, but they are likely not in large metropolitan areas like New York or Los Angeles.
According to a report in the Financial Times, Charter is in preliminary negotiations with the two operators and talks could break down at any time. But it is a signal that Charter may be backing off from trying to block the Comcast/TWC merger, and instead is looking to build its scale more slowly through acquisition.
According to the Financial Times, Charter is mulling over two possible scenarios: buying the subscribers outright from Comcast/TWC after their merger is complete for an estimated $18 billion to $20 billion; or becoming a major minority investor in a spin-out entity that would include the 3-5 million subscribers.
Some analysts doubted that last scenario, adding that if the subscribers were spun off in a separate entity – which would be managed by former TWC executives – having Charter as a major minority investor would not be the ideal situation.
“It’s not clear to us though how the tax benefits of a spin-off would be preserved when Charter eventually takes control of the assets,” wrote Elevation LLC media analyst Stephen Sweeney in a not e to clients. “If Charter can’t buy the lines in the near term and has to wait a few years for the expiration of the limitations of a reverse Morris Trust structure to buy the 3-5 million subscribers outright, it’s not clear to us why it would agree to take just a minority stake at this point.”