Can Time Warner Cable make it alone?
Time Warner Cable’s case for independence grew stronger after it reported one of its strongest subscriber growth quarters in its history, leading analysts to speculate that the second largest cable operator in the country has the upper hand in any future negotiations with potential suitors, particularly Charter Communications.
TWC reported its first quarter of positive basic-video customer growth in the period ended March 31, the first time that has happened since 2009. In addition, high-speed data customers rose at a pace unmatched since 2007, and the MSO tallied its best ever growth in telephone subscribers and residential customer relationships.
In a nutshell, Time Warner Cable is in a vastly different position than it was 14 months ago, when after being relentlessly pursued by Charter, it struck a deal valued at about $67 billion (including debt) with Comcast. That deal, which would have put a substantial amount of money in Time Warner Cable executives’ pockets — chairman and CEO Rob Marcus was eligible to walk away with a cool $80 million — was terminated on April 27 after Comcast determined it would not receive regulatory approval for the deal.
Charter, which according to some reports could meet with TWC later this week to talk about deal potential, has said in the past it would make a run for TWC if the Comcast deal fell apart.
Charter had made a $132.50 per share bid for TWC just prior to Comcast’s offer, which topped $158 per share. But with two solid quarters under its belt — in the fourth quarter, TWC lost 38,000 subscribers, a huge improvement over the prior year — any current offer would have to be at a substantial premium.
MoffettNathanson principal and senior analyst Craig Moffett said the results make a case for TWC to remain independent.
“With no counter-bidder in Comcast to help them negotiate a better deal this time, TWC’s best leverage is a legitimate willingness to say ‘no,’ ” Moffett wrote of the company’s Q1 results. “And that, in turn, requires a convincing demonstration that they can successfully execute on their own. Today they delivered.”
Time Warner Cable shares were down about 1.5% ($2.34 per share) to $155.52 on April 30, while Charter shares fell slightly ($1.24) to $187.06. That could signal that investors believe TWC may not seek a deal, but it could also mean they believe the cable giant is in a position to hold out for a higher price.
TWC’s shareholder base is decidedly different than it was two years ago — mostly gone are the long-term growth holders, replaced by deal arbitrageurs who got into the stock because of the Comcast deal. Those shareholders may be greatly rewarded if a Charter deal is done; some analysts have speculated that Time Warner Cable’s asking price could be in the $175 to $185 per share range.
Still, even at higher prices, some analysts see significant upside to a deal for Charter. In a research note, Morgan Stanley media analyst Ben Swinburne justified a $180 per share bid, 40% financed with debt for Time Warner Cable, adding that the deal would be about 35% accretive to 2018 estimated free cash flow per share and would support a year-end 2015 stock price of $225 for Charter. Minus a deal, Swinburne, who already has a $210 price target on Charter, said the stock will maintain its current trajectory. Even Time Warner Cable, Swinburne said, would only dip about 10% without a sale.
And that could strengthen the case for TWC to go it alone. Most analysts expect Charter to consolidate the cable industry anyway. Swinburne estimated that every additional 1 million subscribers Charter adds increases its free cash flow generation by 5%. And other smaller operators, like Suddenlink Communications, Cox and Mediacom, could be potential targets.
CAP EX RISING
Time Warner Cable executives have already shown that they are serious about the business and aren’t afraid to spend the money to get there. Capital expenditures in the first quarter were $1.1 billion, up 36% from the prior year.
TWC chief financial officer Artie Minson likened the business to a flywheel, adding that while it takes some extra energy to get it going, once it’s moving it’s hard to stop it.
“You have to spend to get the subscriber machine running,” Minson said. “But once it’s running like our flywheel is now, you’re in a great position to deliver strong sustainable financial growth.”