A New Beginning for Time Warner Cable?

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By Tim McElgunn

April 24 — With Comcast Corp.'s acquisition bid for Time Warner Cable Inc. now dead, the three largest U.S. cable operators' outlook is a swirling confusion. And the lack of clarity extends out from that maelstrom to include smaller operators including Suddenlink Communications and privately held operators Cox Communications and Bright House Networks.

Interestingly, the apparent loser—TWC, which loses the payout from the deal—looks to be the company most positively affected by the failure of the deal.

Over the 14 months since the Comcast bid was first announced, TWC's share price has risen from $92 per share to $148.76 at the close of trading yesterday. Among other benefits, the rise in valuation gives TWC better negotiating leverage if Charter Communications Inc. decides that it will have better luck running the regulatory rapids than Comcast has had.

But even if the M&A fever gripping the cable industry subsides, Time Warner Cable now has significantly greater resources with which to actually compete as a going concern.

Network Upgrades, Improved Financial and Operating Results

And, there too, TWC has improved its overall position in the last 14 months.

The company has already been active in upgrading many of its systems to deliver top Internet access speeds of 300 Mbps (megabits per second) under its TWC MAXX initiative. And it has been investing steadily in expanding its already formidable commercial services footprint and service capabilities. High-speed data and commercial services have been the company's primary growth engines for a number of years.

Those investments are paying dividends for the company. Helped by system upgrades in its largest markets and by attractive bundle pricing, TWC's video losses in 4Q14 were the lowest of any fourth quarter since 2006 and among the lowest of any quarter during that period. Indeed, a combination of strong triple play sales and a focus on retaining existing subscribers as they came off their contracts enabled the company to add video subscribers in the final month of 2014.

Residential broadband customers, meanwhile, increased by the highest amount for a fourth quarter in seven years, and exceeded total net additions for all of 2013.

The increase in “triple play” bundles—many of which were upgrades from data and video double plays—also pulled voice subs up strongly.

Share Rise Gives TWC Money to Push Out Gigabit

Now, in the wake of its share price rise, TWC now has the resources to accelerate those investment programs. With DOSCIS 3.1 gear expected to hit the market early next year, TWC should be able to further upgrade to D3.1-enabled gigabit speeds relatively easily at at a reasonable cost.

In the meantime, if the dust settles soon, the company is likely to add more systems to its Maxx target list. Those added systems will likely include some of the systems that were slated to be spun off out of a combined Comcast/TWC and delivered to Charter or the GreatLand Communications rump that Charter was to manage. Based on the company's announcements, many of those systems were left off the upgrade list pending the deal close.

And every system upgrade is dedicated to improving infrastructure that enables and expands Time Warner Cable Business Services, as well as improving residential offers.

And, if TWC is looking to erect a shield wall against an unfriendly advance from Charter, financing some of that investment with debt will help there, as well.

Now What? M&A Possibilities Still in Play

It is too early to speculate extensively about potential acquisition attempts but it is possible to at least list them.

Charter is expected to make another run at TWC, but it is unlikely to make a move until the regulatory rationale for resisting Comcast's bid is better understood. And, as noted, TWC's profile as a target has changed substantially since the merger was proposed.

Time Warner itself is now in position to pursue its own acquisitions, if it truly believes that is in the best interest of its shareholders. Potential targets include Bright House Networks, with which it has had a long and successful relationship, and Suddenlink, which has itself been investing aggressively to upgrade its systems. Either one of those acquisitions would add meaningful scale and, especially in the case of Bright House, bring a very strong commercial services business with it.

Other smaller operators, including Cox and Mediacom look much less likely as merger candidates. Cox is privately held and its well-run systems deliver strong free cash flow to Cox Enterprises. Mediacom operates primarily in smaller cities and, while it has made some noise about adding gigabit services to its portfolio, would bring only about a million high-speed data subscribers and a commercial service business that brought in just $189 million for 2014.

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at tmcelgunn@bna.com

To contact the editor responsible for this story: Bob Emeritz at bemeritz@bna.com


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