Time Warner Cable Stock Surges on Charter Chatter

Report Says Charter Lining Up Bankers for TWC Bid

Time Warner Cable stock soared Friday – closing up nearly 10% ($12.06 each) to $132.92 per share on Friday – after a report in The Wall Street Journal said that Charter Communications was close to lining up bankers for a bid for the New York-based MSO.

Charter shares also rose – they were up as much as 6.3% ($8.02 each) to $134.98 per share in early trading Friday before closing at $134.66 per share, up 6.1% ($7.70 each)..

The news also helped lift other cable stocks – Cablevision Systems shares closed up 5.9% (88 cents each) to $15.80 per share and Comcast stock was up 4.4% ($2.07 each) to close at $49.52 per share.

According to the Journal, Charter was in talks with Bank of America, Deutsche Bank and Barclays PLC about lining up a multi-billion financing for a bid. The Journal added that Charter is also investigating alternate sources of funding for a bid, including sovereign wealth funds and wealthy individuals. The paper added that it was not clear which banks would participate or even if a formal bid would materialize.

Analysts have speculated that TWC could attract a price as high as $140 per share – which would mean the Stamford, Conn.-based cable operator would have to scare up at least $39 billion for a deal. Tack on TWC’s $23 billion in debt and Charter could be on the hook for about $62 billion in a TWC bid.

According to the Journal, Charter was trying to gather up enough steam for a $90 per share cash offer ($25 billion), with the remainder of the deal value made up in Charter stock and equity investments from outside parties.

But news that Charter was at least advancing in talks with lenders was enough for investors, who have been waiting with baited breath for a Charter bid ever since one of its biggest shareholders – Liberty Media – broached the possibility of a Time Warner Cable combination in June.  At an investment conference earlier this week in Barcelona, Spain, the chief financial officers of both companies downplayed a deal.

At the Morgan Stanley Technology, Media & Telecom conference in Barcelona on Nov. 20, Time Warner Cable CFO Artie Minson stuck to the company line when it came to M&A rumors, again stressing that any deal would have to be accretive to shareholders.

“We want to really just make sure in any hypothetical transaction whether around buy side or whatever side that it makes sense for our shareholders,” Minson said.

Charter CFO Chris Winfrey, speaking at the same conference, added that Charter has been very active and very disciplined in the deal market, meaning that it looks at every opportunity but acts on only a few of them.

“The other thing to consider is every time you go into an acquisition, there is an opportunity for distraction,” Winfrey said. “You have to make sure that the opportunity and the accretion to shareholders is commensurate with the opportunity for distraction.”

While a Charter/TWC deal would make sense for the smaller company – it would add 12 million customers in major metro areas like New York, Los Angeles and Dallas to Charter’s mostly rural 4-million-subscriber footprint – the benefits for TWC are less evident. Critics of a deal have pointed out that it would have to be largely financed using Time Warner Cable’s balance sheet.

But TWC, once one of the strongest operators in the cable space has stumbled of late – it reported the single largest quarterly video customer loss in its history in the third quarter (306,000 residential customers) and lost both high-speed data and video customers in the period.  While the video losses were exacerbated by a month-long blackout by CBS in three of its top markets – Los Angeles, New York and Dallas – some investors have been critical of management, which they claim have concentrated on financial returns at the expense of operational results.

TWC has one of the highest dividend yields in the cable industry and is in the middle of an aggressive share repurchase program. Since inception of the buyback program, TWC has repurchased 86 million shares of its outstanding stock and in the first nine months of 2013 returned more than 130% of its free cash flow to shareholders.

Charter, in contrast, has strong management – CEO Tom Rutledge is considered to be one of the strongest operations executives in the industry – and with 34% video penetration of homes passed (the lowest in the industry) has runway for growth.