Deal Talk Will Dominate Upcoming Earnings Season

CHATTER WILL CENTER AROUND TWC’S PERFORMANCE
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Consolidation, not necessarily operating performance, will be the focus of the upcoming cable earnings season, as Charter Communications’ pursuit of Time Warner Cable and other possible industry combinations are expected to dominate the conversation.

Comcast is expected to kick off cable’s earnings season on July 31. And though the largest U.S. cable operator is expected to report another strong quarter, all eyes will be focused on Time Warner Cable’s results, expected to be released Aug. 1.

TWC has underperformed in the past several quarters — basic-video subscriber losses have exceeded expectations in the past five quarters — but the company has made moves to right the ship.

IMPACT ON TWC SHARES

Still, Time Warner Cable’s stock price has risen a stellar 20% since mid-June, when speculation of Charter’s intentions first surfaced. TWC has rebuffed those advances so far, as sources said it has no interest in a transaction that would significantly increase its leverage. Charter is reportedly working with investment banker Goldman Sachs to structure a more palatable deal for the No. 2 MSO, but some analysts believe that TWC’s secondquarter results will be a factor in whether investors push for a combination.

“Either TWC operations improve, which is good for the stock, or they don’t, and the drum will bang more loudly for some form of a deal, which could also be good for the stock,” wrote ISI Group media analysts Vijay Jayant and David Joyce last week.

Most analysts are predicting a slight improvement for New York-based TWC. Jayant and Joyce expect the MSO to shed about 167,000 basic-video customers in the period — down from losses of 169,000 in the prior year — with revenue up 3.4% and cash flow relatively flat at 0.5% growth.

Morgan Stanley media analyst Ben Swinburne predicts greater basic video losses for TWC (183,000) in the period, but slightly better financial growth, with revenue up 3.2% and cash flow gaining 2%. Moffett Research founder and senior analyst Craig Moffett is more optimistic, predicting a loss of 101,000 basic video subscribers with 3.8% revenue and 1.2% cash-flow growth.

Charter is expected to see a seasonally weak second quarter, with stronger growth anticipated for the second half of the year.

Jayant and Joyce predict a dramatic reduction in Charter’s basic-video losses — 25,000 versus 66,000 in the prior year — while revenue and cash flow are expected to rise 4.9% and 5.3% respectively. Morgan Stanley media analyst Ben Swinburne is a little less optimistic, estimating a loss of 47,300 basic-video customers and revenue and cash-flow growth of 5.3% and 3.5%, respectively.

Jayant, Joyce and other top analysts expect Comcast to continue its strong operations pace, keeping basic-video loss improvements in check while growing revenue between 5% and 6% in the period and operating cash flow between 4% and 8%. Analysts are split on their subscriber loss predictions for Cablevision — ISI estimates a gain of 2,000 basic video customers in the quarter, while Morgan Stanley anticipates a loss of 6,000 customers and Moffett Research shoots for a gain of 7,000 subscribers. But all three are on the same page regarding financial metrics — each analyst anticipates a revenue decline in the 6% to 7% range and a 12% to 15% decline in operating cash flow.

Jayant and Joyce, however, are optimistic that Cablevision could turn the corner as the year progresses. The rash of non-pay subscribers resulting from the aftermath of Superstorm Sandy should be behind the Bethpage, N.Y.-based MSO, the analysts wrote. Cablevision operates in a fully penetrated market and faces stiff competition from Verizon Communications’ FiOS TV service, not to mention high programming costs, Jayant and Joyce noted.

CUTTING COSTS WITH SCALE

Those programming costs are what appear to be driving Malone’s lust to consolidate the industry. In the past, the cable legend has said that scale is the only logical defense in beating back double-digit programming rate increases.

That’s largely why Comcast has been largely left out of the consalidation talk. At 21 million subscribers, Comcast would still be far ahead of a combined TWC-Charter (which would have about 16 million customers). Still, Jayant and Joyce say investors shouldn’t totally count Comcast out, even though its preference would appear to be adding content assets.

“Long-overdue cable industry consolidation is on the horizon but it’s taking Dr. Malone’s re-entry to the U.S. cable market to serve as the catalyst,” the analysts wrote. “There are over 900 cable operators in the U.S. — many wish to remain independent, but many also need to combine.”  

TAKEAWAY

The results Time Warner Cable releases on its upcoming analyst call could quicken the drum beat for a tie-up with Charter.

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