TWC’s Poor Results Fire Up Talk of Sale


Time Warner Cable added fuel to the fire of continued consolidation in the cable industry last week, reporting dismal third-quarter subscriber metrics spurred mainly by its recent retransmission-consent dispute with CBS.

The second largest cable operator in the country lost 306,000 basic residential video subscribers in the period (304,000 if business video additions of 2,000 customers are counted), more than twice the 150,000-subscriber loss most analysts predicted. The main culprit was the CBS blackout, which affected about 3.2 million customers in New York, Los Angeles and Dallas for about one month. In addition, TWC said the blackout’s effects spread to its high-speed data and voice products — it lost 24,000 HSD and 128,000 phone customers in the period — as customers dropped triple- and double-play packages.

Analysts had expected the CBS blackout to have an impact on TWC’s results, but even the least optimistic of them were surprised by the overall outcome. Consensus estimates were for TWC to lose between 150,000 and 160,000 video customers in the period. Pivotal Research Group principal and media & communications analyst Jeff Wlodarczak was closest to the actual mark — he had predicted TWC would lose 300,000 video customers.

The poor performance increased the pressure on TWC to do a deal. Its stock rose as much as 6% on Oct. 31 before closing at $120.15 each, up about 3% per share. In June, Charter reportedly made overtures to TWC about a possible deal, but was rejected. Sources have said the initial Charter offer was heavily dependent on using Time Warner Cable’s balance sheet to finance a transaction.


As part of his opening remarks on a conference call to discuss third-quarter results, outgoing chairman and CEO Glenn Britt acknowledged the growing speculation around the company, adding that TWC would only do a deal if it were in the best interests of shareholders. He also pointed out that sometimes mergers don’t live up to their hype; he cited Time Inc.’s 1990 pairing with Warner Communications and the 2001 joining of Time Warner Inc. and AOL, both deals that were initially touted for their mutual benefits but later proved to be “lopsided” toward one of the parties.

“Consolidation can be a good thing,” Britt said. “But the terms really matter.” Britt said in July that he would retire from the company at the end of the year. He added that the transition to new CEO Rob Marcus is going smoothly, and that Marcus, the current chief operating officer, is “a brilliant executive, and he knows how to lead.”

But Marcus could face a rocky first few months in office. Not only does he have to fight off rising pressure to consolidate, he has myriad operational issues to overcome and must find a way to convince investors that the stock — up 25% since June purely on M&A speculation — is just as valuable as an organic growth play.

In contrast, Comcast, which reported its third-quarter earnings on Oct. 30, was largely in line with analysts’s expectations. The nation’s largest cable operator lost about 129,000 basic-video customers in the period (slightly ahead of the 117,000 it lost in the prior year) but nearly matched estimates for high-speed data additions (297,000 vs. 305,000 consensus) and exceeded targets for phone additions (169,000 vs.125,000 consensus).

In a research note last week, MoffettNathanson principal and senior analyst Craig Moffett noted that the results have broader implications, changing the dynamics of retransmission- consent negotiations for all operators going forward.

“Every cable operator now goes to the table knowing that CBS not only won the war, but left TWC badly damaged even for having fought the fight,” Moffett wrote. “If you thought the scales were tipped in programmers’ favor before, now you know that it is worse than you imagined.”

Marcus, on the conference call with analysts, said TWC is making moves to win back customers, noting that it is about to launch a holiday promotion that will give new customers a Samsung tablet loaded with features. In addition, the company is aggressively targeting DSL customers in its footprint with a new 2-Megabit-persecond high-speed data offering priced at $14.95 per month; that offer is expected to begin in the next two weeks. Marcus said the goal is to convert at least 500,000 DSL customers to TWC broadband in the next 18 months.

The incoming CEO added that he has been working with senior management over the past 90 days to develop a plan to improve the customer experience. They came up with a strategy to target markets within TWC’s footprint that receive the most trouble calls and designate them TWC Max Markets, which will receive a totally revamped customer experience, improved network reliability, be all-digital, and receive “quantum changes” in high-speed data tiers. TWC will begin designating TWC Max Markets next year.

“While these are ambitious plans, we firmly believe that the potential benefits over time will be significant — a happier, more stable subscriber base, a more robust platform on which to grow and innovate, and an even stronger competitive position,” Marcus said.

Most other analysts expect TWC to improve results in the fourth quarter, which could temper the consolidation fire.

In his note last Thursday, Moffett wrote that the poor Q3 results could squelch some of the deal talk.

“Maybe, just maybe, Liberty and Charter won’t be willing to pay as much as is currently embedded in TWC’s shares for a TWC that is operating this poorly,” Moffett wrote.


After losing more than twice the video subscribers analysts had expected, Time Warner Cable is under more pressure than ever to do a deal.