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Does anyone have a real reason to buy TWC?

Mon, 11/25/2013 - 2:08pm
Brian Santo

Late Friday, those agitating for consolidation in the cable industry floated the notion of Charter Communications and Comcast bidding on Time Warner Cable together, then breaking it up into pieces, with each claiming chunks.

The news was well received by Wall Street merger-and-acquisition (M&A) experts and investors, who bid up the values of the stock of any MSO rumored to be party to any such deal.  

John Malone is actively agitating for consolidation, and his opinion counts. He chairs Liberty Media, which recently bought a bit over one-quarter of Charter, which is reported to be securing financing for a possible deal.

Malone has argued that a Charter/TWC combination would benefit in terms of economies-of-scale in purchasing equipment and increased leverage when negotiating rights to programming.

Not everybody else involved agrees.

TWC does not appear philosophically opposed to a deal. But nearly every top executive at the company has been repeating for the months during which these rumors have been swirling that any deal would have to have demonstrable value for investors.

But it is perhaps telling that at no point has anyone at TWC expressed anything that validates the idea that a merger or acquisition would have a particularly beneficial effect on purchasing power or negotiating stance when forging programming contracts.

Furthermore, analyst Craig Moffett, principal at MoffettNathanson Research reported Charter CEO Tom Rutledge can’t make a good case for the deal. Moffett says Rutledge couldn’t specify any particular “synergies.” The best rationale for buying TWC he could offer was running TWC better. Moffett noted that TWC seems to be running just fine.

(That assumes Rutledge means something other than “layoffs” when he says “synergies.”)  

But the fact is that the fees for the M&A guys on Wall Street would be huge, perhaps almost as big as John Malone’s ego. Those two things alone suggest some sort of a deal will be made, perhaps even by the end of the year.  

Bringing us back to Charter and Comcast bidding on TWC together. The benefit for Charter is that a chunk of TWC would be more easily digestible than the whole thing, and that the inevitable anti-monopoly concerns about Comcast would be mitigated if Comcast were to swallow only part of TWC, rather than the entirety.

Amy Yong of Macquarie Securities believes the likelihood of Comcast participation is low.

But should the three-way deal be consummated, she calculates that about 40m pay TV households will likely get consolidated/redistributed among Comcast-Time Warner Cable-Charter within the next 12 months.

She believes one result is that cable will win back market share and will gain pricing power.

“Finally, multiples are poised to expand as the balance of power becomes equalized and distribution is closer to becoming king.”

Yay for investors.

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