Time Warner Cable (UNKNOWN:TWC.DL) shares traded at an all-time high on Friday on news that Comcast (NASDAQ:CMCSA) or Charter Communications (NASDAQ:CHTR) may make a bid on the company. Comcast's entry into the discussion on Friday means multiple bidders for the second-largest cable company in America, which Comcast has been eyeing for some time. Comcast is a threat to Charter shareholders, but could be a savior for Time Warner.
Charter needs to make an acquisition
Charter is reportedly in talks with banks for debt funding that would underpin a Time Warner Cable acquisition. Charter is currently the fourth-largest cable company in the country with 4.3 million subscribers, and it's about one-third the size of Time Warner in market cap. A merger between the two companies would result in a business that is highly leveraged.
Charter shareholders don't mind. The company emerged from bankruptcy in 2009, and the stock has gained 65% year-to-date. A lot of the gains are fueled by M&A rumors as the company continues to post losses and moderate revenue gains. Earlier this year, the company closed a deal with Cablevision to acquire Optimum West for $1.6 billion.
Charter could boost the operating results of any profitable cable operator with its sizable tax credits. That's why John Malone, who owns a 27% stake in the company through Liberty Global, is on the hunt for acquisitions. Malone has long called for consolidation in the cable industry as it faces growing competition from telecom companies and over-the-top services.
Malone and Charter are now strapped with the task of wooing Time Warner's board to complete a takeover, or improve their own results organically to justify the share price. I'd rather stay away as an investor, but believe the former is likely if Time Warner can't improve its own results in the near future. Of course, a successful bid from Comcast could throw a wrench in the whole thing.
Comcast: a white knight
Time Warner Cable has made it clear that its preferred buyer, should it decide to sell, is Comcast. Comcast has less debt and is much better positioned to make an acquisition the size of Time Warner.
Comcast, however, would need to gain approval from the Department of Justice and the FCC because the resulting company would control about one-third of all pay-TV subscribers in the United States.
Now that's consolidation!
Such a company would hold significant leverage over content owners. Notice how Comcast is mostly absent in the news regarding carriage-fee disputes. Its size is its biggest advantage. If it gains another 11 million video subscribers, the leverage shifts further in favor of Comcast in getting what it wants from the networks.
Time Warner Cable lost 306,000 video subscribers last quarter when it blacked out CBS and Showtime for 32 days while disputing carriage fees. In the end, regardless of how much Time Warner saved in fees, it clearly lost the battle. A merger between Comcast and Time Warner ought to prevent such prolonged blackouts, as networks can't afford to lose one-third of their potential viewers.
The prettiest girl at the dance
Right now, Time Warner must feel like the prettiest girl at the dance. But like many pretty girls at dances it has a bit of an attitude. The company's board thinks it's too good for Charter, but its other suitor may see disapproval from an authority figure (i.e. the FCC).
If Time Warner Cable fails to turn things around soon, its current price seems unjustified, and it may be forced to accept a takeover bid. Charter could be a winner if the FCC or DoJ blocks Comcast, but it too needs to turn things around in lieu of another acquisition.