TWC Shares Rise On M&A Spec

Stock Up As Much As 6% After Poor Q3 Results

Time Warner Cable stock was up 6% in early trading Thursday after the second largest cable operator’s poor third quarter results helped drive speculation that a deal to sell the company was increasingly likely.

Time Warner Cable shed 306,000 residential video subscribers in the third quarter, nearly twice the number lost in the prior year and driven primarily by the month-long retransmission consent dispute between the MSO and broadcaster CBS.

Time Warner shares rose as high as $123.93 each (up 6%, or $7.01 each) in early trading Oct. 31 as investors believed that a deal with Charter Communications is more likely than ever. The stock calmed down a bit in later trading, closing Oct. 31 at $120.15  each (up 3% or $3.27each).

Charter shares also rose Thursday, up as much as 2% ($2.90 each) to $137.92 in early trading before closing at $134.04 on Oct. 31, down 1% (98 cents).

Analysts had expected the CBS retrans spat – which darkened the broadcast giant to about 3 million TWC subscribers in New York, Los Angeles and Dallas between Aug, 2 and Sept. 2 – to have an impact on vide customer results, but not that much, In addition, chief operating officer Rob Marcus noted that the dispute bled into other product lines – TWC lost about 24,000 residential high-speed data customers in the period and shed 128,000 residential phone subscribers.

Financially, the picture was a little better – revenue was up 2.9% and adjusted operating income before depreciation and amortization (AOIBDA) rose 3% in the period. Credit Suisse First Boston media analysts Michael Senno wrote that in any other case,, results like TWC’s would have sent the stock southward, “however investors may view the weak operating results as increasing the likelihood of a deal, which could support shares.”

Time Warner Cable has consistently pushed back Charter Communications acquisition overtures, which began in earnest in June, claiming a deal wouldn’t make sense for its shareholders. The second  largest MSO in the country kept up that stance in a conference call with analyst on Thursday morning, with chairman and CEO Glenn Britt, slated to retire at the end of the year, pointing to past mega mergers that didn’t work out as planned.

Britt highlighted two such mergers – Time Inc. 1989 pairing of Warner Communications and Time Warner Inc.’s 2001 joining with AOL as examples of deals that were originally touted for their mutual merits but later proved to be heavily “lopsided” toward one party.

“Consolidation can be a good thing,” Britt said. “But the terms really matter.”

Still, the bulk of Time Warner Cable’s stock appreciation over the past four months – it is up about 25% since June when the Charter speculation first began –  has been based on the hope a deal could get done. And with continued poor performance, the cards may be stacked against remaining independent.    

“If Time Warner Cable wants to remain independent, this probably isn’t the best way to go about it,” wrote MoffettNathanson principal and senior analyst Craig Moffett in a note to clients concerning TWC’s results.

Marcus, on the conference call with analysts said that TWC is making moves to win back customers, noting that it is about to launch a Holiday promotion that will give new customers a new Samsung tablet loaded with features. In addition, the company is aggressively targeting DSL customers in its footprint with a new $14.95 high-speed data offering 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 in-coming CEO added that he has been working with senior management over the past 90 days to develop a plan to improve the customer experience. What they came up with is a strategy to target markets within its footprint with 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.