Time Warner / Charter Deal Suggests Trouble For Cable Industry

Time Warner and Charter Cable have taken a cue from U.S. regulators. Recently it was reported that they suggested that just because they opposed the Time Warner – Comcast deal, it didn’t mean that they were opposed to all mergers in the cable industry.

It  It didn’t take long for Time Warner and Charter to read between the lines and take up regulators on what appeared like a veiled offer. But will the deal be good for the cable industry? That’s the great debate among industry watchers now.

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On the side of Charter’s offer

Even though regulators practically issued an invitation (if the reports about the phone calls are true), the market doesn’t seem to be sure that Charter’s offer to buy Time Warner Cable will receive their approval. But as is the case with all buyout offers, there are arguments both for and against it.

On the bullish side of the deal is Raymond James analysts Frank Louthan IV and Alexander Sklar. They reiterated their Outperform rating and $210 per share price target on Charter Communications. Charter offered about $90 billion for both Time Warner Cable and Bright House.

The Raymond James team thinks that such a high multiple suggests that management is expecting “significant operating and growth synergies over time.” Charter’s CEO recently said he’s comfortable with their offered price, which further backs up their belief. The analysts also said that Charter shareholders are “trading ownership for scale,” noting that after the merger, Charter shareholders will only control 24% of the combined company. Additionally, they think the high multiple was influenced by the possibility that Altice might make a bid as well.

Further, they believe the Federal Communications Commission will indeed approve the offer because it doesn’t place such widespread broadband reach under one roof as Comcast’s offer for Time Warner would have.

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Time Warner / Charter Deal Suggests Trouble For Cable Industry

 

Charter may behave more like regulators want

Canaccord Genuity analysts Gregory Miller and Matthew Kahn are also of the opinion that the deal will close. They have an interesting viewpoint regarding Comcast’s offer for Time Warner, saying they think regulators opposed it because of “the behavior of Comcast with internet partners such as Cogent and Level 3 and how Comcast controls access to its subscribers.”

They think the Charter deal has a better chance of getting approval because the company doesn’t restrict access to its customer base in an attempt to get more fees from broadband customers. As a result, they suggest that regulators see Charter as being “more likely to adhere to the spirit of the prior broadband issued by the FCC.”

They’ve maintained their Buy rating and $205 per share price target on Charter, calling the offer “the worst kept secret.” They like the offer because it puts Charter on track to become the third biggest pay-TV provider in the U.S and the second biggest broadband provider.

Also on the side of the deal are UBS analysts John Hodulik, Batya Levi and Lisa Friedman, who maintained their Buy ratings on both Charter and Time Warner Cable but upped their Time Warner price target from $170 to $219 per share. Their price target on Charter remains $220 per share.

Time Warner Cable downgraded

On the other hand, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata downgraded Time Warner Cable from Buy to Hold because they think there’s limited upside due to Charter’s “full valuation.” They also slashed their price target to $197 per share. They’re now assuming a 50/50 split between the offer’s two cash components.

Additionally, they cut their price target for Charter to $180 per share because they think the accretion of the deals to Charter is lower than they previously thought.

What would a Time Warner – Charter deal mean for the industry?

Interestingly, IBISWorld analyst Will McKitterick said in a blog post that the deal between Charter and Time Warner Cable doesn’t come as a surprise but that it signals that the cable industry is “in distress.” They point out that currently, the top five cable companies generate approximately 84.1% of the revenue in the industry.

The combined Time Warner and Charter would hold about 29% of the market. It would also mean the greatest majority of U.S. cable service would come from only two companies. As a result, they still think the FCC may keep the deal from going through. And even if regulators do block it, he doesn’t think they will put a stop to the flood of mergers and deals going on in the cable industry.