Time Warner Cable Stock Hits High on Comcast Deal, Charter Drops

5:46 AM PST 02/13/2014 by Georg Szalai
Angela Weiss/Getty Images
Comcast CEO Brian Roberts

UPDATED: One observer says the combined company will have "formidable scale to combat escalating programming pressures," while Charter's deal hopes are thwarted for now.

With Comcast on Thursday unveiling a $45.2 billion deal to acquire Time Warner Cable, the stock of the latter jumped in early trading. But shares of Charter Communications, which had been stalking Time Warner Cable, dropped.

As of 9:35 a.m. ET, Time Warner Cable's stock was up 7.9 percent at $146 after earlier going even higher to set what was at least a 52-week high, while shares of Charter, in which John Malone's Liberty Media owns a 27.3 percent stake, was down 8.8 percent to $125.50.

Comcast's stock at the same time was down 2 percent to $54.15, near its 52-week high of $55.28. The stock prices of acquiring companies typically drop after a deal is announced, while the stock of companies that are being taken over tends to rise.

Charter investors "have been pricing in a potential TWC-Charter transaction over the last few months," says Macquarie Securities analyst Amy Yong.

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Wall Street analysts on Thursday started discussing regulatory challenges and financial benefits of the proposed combination.

Wunderlich Securities analyst Matthew Harrigan expressed regulatory concerns, arguing that the deal was "problematical, from the vantage point of the FCC and Department of Justice, with reservations having been expressed last year by FCC commissioners."

But he also calls the deal a "game changer" for Comcast in terms of reach and technological innovation opportunities.

With roughly 30 million video and 29 million broadband customers, the combined firm will have national scale that will make it easier to develop "high engineering complexity businesses, such as a more versatile WiFi business … as well as national marketing," he says.

Yong entitled her report on the planned combination "Cable's New Poom Poom Bow," highlighting the merged company's increased leverage in talks with TV network operators.

"Investors will likely assign a higher multiple on the following," she wrote. "1) management's ability to flex its underutilized balance sheet including potential share repurchases; 2) room for significant operational improvement, and 3) unmatchable leadership in the industry and formidable scale to combat escalating programming pressures."

Harrigan also lauded Comcast as making good on old promises of synergies between content and distribution businesses.

"Comcast seems to be delivering on the frustrated 1990s ambitions for Time Warner to find synergies among distribution and content," he said. "For instance, ratings for top new NBC show The Blacklist can be 40 percent-plus higher in Comcast cable markets. Even the 'minions' [of Despicable Me fame] could be used to convey that [Comcast's] Xfinity is hard at work improving Time Warner Cable's product suite. The negative is that NBCUniversal ownership further complicates regulatory approval."

Before exact terms were disclosed, Yong estimated that the deal could be 7 percent to 9 percent accretive to Comcast's financials in 2015.

Wells Fargo analyst Marci Ryvicker said that Comcast's forecast for synergies of $1.5 billion could be conservative. "This is expense related," she said. "There are likely revenue synergies, which are not included in this number, and likely to be achieved within three years from closing."

Discussing the deal's benefits for Time Warner Cable and its shareholders, Yong said: "This is the best-case scenario for TWC shareholders as the offer represents a healthy premium to current shares and is significantly above Charter's [recent] $132.50 per share offer. The deal also gives shareholders the opportunity to own roughly 25 percent of the new company and leave Time Warner Cable in the hands of a management team with a proven operational track record and conservative financial planning."

MoffettNathanson analyst Craig Moffett recently said that if Comcast could acquire Time Warner Cable's New York market, it would get its hands on a set of new crown jewels.

"If Comcast succeeds in acquiring TWC's New York City system, they will have positioned themselves for cable's next leg of growth in an entirely new segment of the business," he said before the Comcast deal became known. "First there was residential video. Then residential broadband and phone. A few years ago, cable began targeting small and medium business. Enterprise services is next, and it is arguably the biggest of all."

He concluded that Comcast has the chance to build a Boardwalk Empire, saying: "Only Comcast is positioned to think generationally about cable’s future. And New York City, the system we have always called TWC’s 'boardwalk,' was the missing piece of the puzzle."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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