April 25, 2015 - 10:50am EST by
2015 2016
Price: 53.33 EPS 0 0
Shares Out. (in M): 104 P/E 0 0
Market Cap (in $M): 5,556 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Multi System Operator (MSO), CATV, Cable
  • Malone
  • Potential Future Acquisitions


Broadband shares present an exceptional risk/reward due to the perceived
uncertainty from a Charter / Time Warner Cable deal. There have been
numerous write-ups on VIC on Charter, so I’ll skip details about the quality of the
business both on the internet and video side and focus on the opportunity that the
rejection of the Comcast / Time Warner Cable deal presents.
I think Liberty Broadband basically has two scenarios which could occur over the
next 5 years. One scenario is that they end up acquiring Time Warner Cable and
potentially roll up additional properties such as Brighthouse, Cox, Cable One,
Suddenlink, Mediacom, etc. The other scenario is that they don’t acquire Time
Warner Cable and end up rolling some of the other properties mentioned above.
First of all, if I think about the probabilities of the two scenarios, I think it’s highly
likely that Charter will be able to acquire Time Warner Cable. There are a couple of
reasons I think this. First of all, we can explore why the Time Warner Cable /
Comcast deal didn’t go through. The primary pushback from the FCC and DOJ was
that there would be a high level of concentration of the broadband market in one
company (56.8% market share of the broadband market in the USA defined as
25Mbps or above) and this could lead to a Comcast / Time Warner Cable combined
company attempting to impede emerging video competitors. Below is a table
highlighting Comcast market share post a TWC transaction which Comcast filed with
the FCC in December 2014.
When Comcast structured divestitures to Charter and Greatland Communications,
they were focused on appeasing regulators in terms of keeping video subs below the
30% market share threshold without giving due consideration to broadband market
concentration. Of course, when Tom Wheeler suggested a change in the definition of
high speed broadband to 25Mbps or above, it dramatically changed the perceived
market power of a Comcast combination due to the drop out of DSL as a high speed
competitor. What’s interesting to note in the table above is that Comcast’s market
share only changes by 1% due to a transaction with TWC (from 55.8% to 56.8%).
The reason that this is the case is that Time Warner Cable has virtually no
broadband customers at speeds above 25Mbps. A combined Charter / TWC would
have dramatically less market share of the high speed broadband market (likely less
than 20%). It’s difficult to know exactly what percentage of the high speed
broadband market Charter / TWC would have, but this is what we do know.
Comcast has 22 million high speed internet subscribers of which it is unclear how
many are subscribing to 25Mbps or above. Time Warner Cable has 12mm internet
subs of which very few are subscribing to 25Mbps or above. Charter has 4.8mm
internet subs of which a very high portion are subscribing to 25Mbps or above. This
results in a combined Charter / TWC having substantially less market share of the
high speed broadband segment. When combined with the fact that this combined
entity would have no programming assets like a Comcast entity (NBCU assets), it
reduces regulatory fears of having to protect an incumbent programming business
from online video. These facts leads me to believe that the odds of a Comcast / Time
Warner transaction getting through regulatory hurdles through the DOJ / FCC is
very high and significantly higher than the initial odds of a Comcast / Time Warner
Cable transaction due to the significantly lower broadband market share for a
Charter / Time Warner Cable combination.
So aside from the regulatory, then we have to think about the probability that
Charter wants to acquire Time Warner Cable and that Time Warner Cable
shareholders / management wants to be acquired by Charter. First off, let me say
there are no other credible bidders for the Time Warner Cable asset. The other cable
players are smaller and don’t have a currency (stock) with which to buy Time
Warner cable. Given their smaller size, they also wouldn’t reap as much synergies
from a deal. There are similar issues with private equity buyers in terms of lack of
synergies from a deal which prohibits them from bidding on this asset (synergies
resulting in scale from programming costs, marketing, capex, etc.). In terms of
Charter’s appetite for Time Warner Cable, it is clear that they are very interested in
acquiring the asset. When Craig Moffett asked John Malone during the Liberty
Broadband Investor Day in November as to whether he would be interested in
acquiring Time Warner cable, he quickly responded very enthusiastically with a
“Hell Yes.” In addition, right after the Comcast / Time Warner Cable deal collapsed,
there were Bloomberg articles citing that Charter advisors had already approached
Time Warner Cable advisors. This was merely hours after Comcast publicly
announced that the deal was broken. In terms of Time Warner Cable’s management
and shareholder appetite for Charter it seems there is interest. With regards to
management, it bears mentioning that Time Warner Cable management was set to
receive a significant payout upon conclusion of the Comcast deal. Given that it didn’t
happen, they may be inclined to be looking to cash out and receive a massive payday
from a sale rather than continue to run the Time Warner Cable asset. Even if
management does resist to a Charter bid, I think that Charter will likely go hostile as
they did previously and appeal to Time Warner Cable shareholders who would
likely be willing to sell at the right price. From a shareholder perspective, a good
chunk of Time Warner Cable shareholders are likely playing the merger arb game.
Indeed, the fact that Time Warner Cable stock went up post a failed bid from
Comcast suggests that the market is pricing in significant odds that a Charter / Time
Warner Cable transaction occurs. The Comcast / Time Warner Cable arb spread
reached roughly 15%-16% in the last couple of days. If you look at rumored prices
on Time Warner Cable in the $160 - $170 range, the spread has presumably shrunk
to 5-10%. I believe Time Warner Cable’s stock price would be significantly lower if
there wasn’t a good chance of it being acquired by Charter (primarily due to no
synergies, plus a mediocre management team running the business).
In terms of likely accretion to Charter shareholders from a TWC deal I think it’s
tricky to quantify given the presence of numerous unknown variables. The way I
think about it is that a Time Warner Cable deal now would likely be more accretive
than a deal as was contemplated under a previous scenario with Charter receiving
the divestitures, a portion of the spin, and Brighthouse. The primary reason I think
this is that the synergies from scale are much higher. Not only does Charter now
have more heft against programmers due to the sheer number of subscribers, but
they also have potentially much more synergy and scale from geographical
consolidation not only of Time Warner Cable but subsequent acquisitions they may
structure from Cox, Cable One, etc. As I wrote in my previous write-up in December
2014 that Charter could do $30 / FCF / share 5 years out resulting in a 2-3x return, I
think that under a future contemplated deal with Time Warner Cable this is likely to
result in higher FCF / share numbers with a resulting return likely being more
towards the 3x than the 2x over a 5 year period. From a financing perspective, this
deal is likely to be accretive to Charter shareholders given that Time Warner Cable
is underlevered at less than 3x, Charter has more leverage firepower being levered
under 4.5x (and potentially even more debt capacity if they strike a simultaneous
deal with Brighthouse given that the Advance / Newhouse family wants a good
chunk of stock rather than cash given that they are smart and know this thing will
compound at good rates in the future), and the 10-year Treasury is at 1.91% and
Charter was recently issuing debt at less than 6% pre-tax for bonds with a longer
maturity than 10 years. I think the outlook is even brighter for Liberty Broadband as
Liberty Broadband shareholders are likely to receive better terms and compounding
than Charter shareholders. Part of this has to do with the fact that Liberty
Broadband is trading at a 10% discount to a sum of the parts and this is likely to
completely collapse in the next couple of years a la previous Malone holding entities
such as DirecTV and Discovery. In addition, you have big optionality with the $697
million of cash that Liberty Broadband raised during the rights offering. In the
Brighthouse deal, Liberty Broadband shareholders were getting a sweetheart price
of $173 for incremental Charter shares when the equity was trading above $190.
Given that Charter needs incremental equity to fund a Time Warner Cable deal, John
Malone is likely to extract highly favorable economics for Liberty Broadband
shareholders given the need for equity to structure this massive acquisition.
I think the main risk is that a Time Warner Cable deal does not occur. In the long
term, even if a Time Warner Cable deal doesn’t happen, I think you are unlikely to
lose money over a 5 year period given future consolidation opportunities combined
with a levered equity shrink at Charter. Given the 10% discount at Liberty
Broadband, that provides additional cushion. However, I think the probability of this
happening is extremely low given the history of interactions between Time Warner
Cable and Charter as well as John Malone’s track record and history. However, given
all the very smart people on VIC around cable, I would welcome comments on the
bear case as well as why a Time Warner Cable / Charter deal will not occur or why it
won’t be extremely accretive over the next 5 years to Charter/ Liberty Broadband
shareholders. Thank you for your time and especially for thoughts / comments
contrary to my arguments above!


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Time Warner Cable acquisition by Charter. Additional acquisitions in the future. Higher broadband penetration. Higher FCF / share in the future.

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