March 26, 2009 - 12:42pm EST by
2009 2010
Price: 27.50 EPS $3.00 $3.00
Shares Out. (in M): 382 P/E 7.0x 9.0x
Market Cap (in $M): 10,505 P/FCF 4.3x 4.3x
Net Debt (in $M): 15,500 EBIT 0 0
TEV ($): 27,585 TEV/EBIT 8.9x 7.7x

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TWC is trading at 4.75 times EBITDA less maintenance capex in an industry that is poised to benefit from the recession in 2009.  Furthermore, there are other catalysts that can make this stock be more fully valued.


Time Warner Cable (TWC) is the second largest cable operator in the U.S. (approximately 14.6 million subscribers), with technically-advanced, well-clustered systems located mainly in New York state, the Carolinas, Ohio, southern California, and Texas. Jointly with Comcast, TWC acquired substantially all the assets of Adelphia Communications, 8/06. As of 12/31/07, has 45,600 employees including 1,600 part timers.


Time Warner recently spun-off its 91% stake in TWC. This move better positions TWC to participate in any sort of cable industry consolidation. As part of the spin-off, TWC paid the parent a one-time dividend of $10.9 billion. To fund the dividend, TWC took on more debt. On March 26, it is expected to close another $3 Billion debt offering.


TWC is more than 50% off its 2007 highs. TWC has been the worst performer in the Cable TV group, partly as a result of the selling pressure by Time Warner shareholders.   However, I think things are not as dire as it looks.


Reason #1. Cable TV as a group is still expected to turn in a profit of $7.4 billion on revenues of nearly $112 billion in a very difficult year 2009.  While companies in this group are definitely being impacted by the economy, they should benefit from consumers staying home more for entertainment during times of recession.  Comments taken from the conference presentation held at the Deutsche Bank Conference a few months ago: "<A - Robert Marcus>: I think we've got a very compelling proposition as a stand-alone company. I mean first and foremost, we are in a fundamentally good business. And I can't tell you how good it is, as you sit here today in this environment, to be in a business that is growing when so many companies around us and the U.S. economy as a whole are hunkering down and contracting."


Reason #2. Company's immediate goals will be delevering and sees 15% growth in cash flow for 2009 versus 2008. From the same presentation: "<A - Robert Marcus>: From a balance sheet perspective, we've been pretty clear about number one priority for the first year out of the chute. And that is really applying our free cash flow to delever back down to a target leverage ratio of about 3.25 times. So we've come out of the blocks at about 3.75. ... I guess, let me be, before I answer the question, let me just recap what in fact we did say on the call. We gave guidance this year a little bit differently than we have in the past. We didn't do the formal press release. We tried to give a little bit more -- in light of the uncertainty out there, a little more qualitative guidance. So let me tell you what we said. We said, we'd grow revenues and OIBDA. We said that adjusted OIBDA less CapEx would grow at least as fast in '09 as it did in '08. And what that translates to is at least 15% growth. We also said that we expected our EPS to be about a buck. That's on a pre-reverse split basis."


Reason #3. Threats loom in the form of: a.)delivery of tv programming on the internet, b.) ILEC's own video offerings, c.) TWC's not having a wireless component for its subscribers. d.)Satellite Broadcasting. While threats are real, company seems to have a competitive response for each and the jury is still out. In the meantime, the cash flow continues to come in. Competitive responses for each are:


a.) Probably the scariest threat is free tv programming on the internet.  But cable TVs represent a substantial portion of revenues of their programming content providers. Cable TVs should have a strong position in terms of dictating the strategic migration to providing TV programming on the internet. (Their contractual obligations alone for programming purchases amount to 11.6 Billion until 2014 and after) They are discussing the concept of entitlement - a subscriber can watch the same programs on the internet as well as cable TV.   Quoting the CEO: "Yeah. I think you said it well. There is no question that as a result of tough times people are shopping around more, price shopping, and that's both a risk and an opportunity. And we're doing a lot to try to mitigate the risk side of it and take advantage of the opportunity. We've priced and packaged our products in a way that I think positions them as a meaningful value opportunity for customers. We've got bundles that offer discounts. We've got the price lock guarantee, which offers price certainty over a longer period of time, and we've tiered our various

products so that people can buy a cheaper product if that's what suits their budget, albeit with lower capabilities, whether that's lower speeds on the data side or local products as opposed to unlimited nationwide products on the voice side. So I think we've got an opportunity to capture some share as people shop around for the best value. We're mitigating the risk by instituting this concept of price lock guarantee, which both offers certainty to the customer, but also voluntarily locks them into us for extended periods of time. So it makes them less vulnerable to other of our competitors who are undoubtedly trying to seize the same opportunity we are. So that's on the residential side.

On the commercial side, I think your point is absolutely well taken. We're the value provider. In most cases, we're pricing below where the incumbent ILEC is pricing. And I think in tough economic times, even though telecom spend is probably coming down in aggregate, it sets us up as the new entrant to pick up some share. So I do think there's opportunity."

b,)They are pricing themselves below the ILEC's so they have a cost advantage. Also, New York City which is their bailiwick will take much, much longer for ILEC's to come in.  

 "In most cases, we're pricing below where the incumbent ILEC is pricing. And I think in tough economic times, even though telecom spend is probably coming down in aggregate, it sets us up as the new entrant to pick up some share. So I do think there's opportunity.

<Q>: How much do you think you're pricing on average below the ILECs?

<A - Robert Marcus>: Yeah. Tough to say; it varies by market-by-market and it's product-by-product. So I'm hesitant to give you a number one that ... We're so far competing quite well with both guys. We've said for a long time that when a new entry comes into the market, they're going to pick up some video subs; they've done that. It's not dissimilar from the phenomenon that existed when we entered markets with our phone product. You get a quick burst for sure and then the challenge is what do you do from there? We've been gearing up for years in every market that they're coming into. We've enhanced our marketing to press our advantages. We've highlighted, we've enhanced our products in markets like New York City, where we know they're coming, increased HD channels, introduced Start Over, over time we'll roll out ...So we feel pretty good about where we sit. Quote "<Q>: And you sort of, not to put too fine a point on it, but no real concerns relative to your 2009 outlook for FiOS expanding in the New York area? <A - Robert Marcus>: So what they have done is entirely what we expected ... So they're pretty, their services are pretty widely offered in Staten Island, they've done okay, pretty much what we thought they'd do. They'll probably go to Brooklyn and Queens next, and then the Big Kahuna is Manhattan. And that's really a totally unique market and probably a much longer-term project for them. It's not to say they won't ultimately get in there, but there is something like 40,000 residential apartment buildings in Manhattan. So pulling fiber from the conduits in the street into the buildings, up the risers, through the hallways to the individual apartments is no easy task. And you've got to get through building owners' co-op boards, supers and all that stuff before you get there. So it's a challenge. They'll do it, but it's going to be a longer-term project. In the meantime, I think we've been planning quite effectively. We're up to over 100 HD channels in New York City. We've got Start Over there, we're certainly ready to face them.


c.) TWC's response to RBOC's wireless offereings is their Clearwire investment: In November 2008, TWC, Intel Corporation ("Intel"), Google Inc., Comcast and Bright House Networks, LLC (together with TWC, Intel Corporation, Google Inc. and Comcast, the "Clearwire Investors") collectively invested $3.2 billion in Clearwire Corp and one of its operating subsidiaries, Clearwire LLC. TWC's final ownership interest in Clearwire will be determined based on the trading price of Clearwire Corp's Class A common stock during a post-closing measuring period ending on February 26, 2009. If the volume weighted average trading price is $17 or below, TWC's ownership interest will be approximately 4.4%. The closing price of Clearwire Corp's Class A common stock on February 13, 2009 was $3.60. Quote: "So what we're working towards is trying to figure out exactly how we play in that space. We're working hard via the Clearwire joint venture to deliver sort of the initial products that are consistent with that vision. And hopefully we'll be doing that later this year in at least one market, maybe a couple. Clearwire is in the process of building out its network, and some Time Warner Cable markets are on the hit parade. So you should look forward to seeing that, probably be a data-focused product, although I'm not going to say much more about it because we're still working on exactly how it gets packaged and priced."

d.) While Satellite has an edge in High-Definition TV, TWC has VOD, Start Over, and many offerings.  "Look, I think we've done a very good job competing with DBS. We certainly recognized that

they were winning the marketing battle on the HD front. And through the rollout of our switch digital platform, we've been able to really ramp up on HD, I think on average we have about 60 HD channels offered in our markets and in certain specified cities we've got much more than that. New York City as I said, we've got over 100. So eliminating any perceived gap on the HD front was an important step.

And then we've also tried to press our advantage where we have features that differentiate us from satellite. The bundle has certainly been a big factor there. And the two-way plant has also been a big factor there. We've highlighted VOD,

Start Over, etcetera. So Start Over in particular, we've rolled out extensively during 2008. I think we've got 3.2 million digital customers that are Start Over-enabled now, and people are using it like crazy. One stat I love is in December, in Buffalo, somewhere on the order of 70% of our digital customers used Start Over at least 10 times. That's pretty heavy use, suggesting to me that that means we're offering them a product that they certainly value. So we're pushing hard on the things that differentiate us from the satellite guys."


Reason #4) TWC is poised to get more business from business customers. Quoting CEO: "And then there's this relatively smaller business called our commercial business, which is a really interesting opportunity. We did about $800 million of revenue in our commercial business last year, grew that about 20%. And we're expecting to see continued meaningful growth from that perspective. So we've got a growing business, that's the number one good guy -- number one interesting thing about the story."


Reason#5) TWC can be a takeover target in  a consolidating industry.  TWC's independence makes this an easier transaction to make.


Reason#6)  Insiders are incentivized to increase shareholder value.  Options are struck at prices around where the stock is currently trading at.  Given that the management most likely knows what needs to be done all along, they had been waiting for this opportunity to be independent.



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Maintenance capex is estimated at 800M to 1B, about half of Comcast's.  So at these prices you are effectively paying about  4.75 times EBITDA less Maintenance Capex.


**Adjustments include $150 Million in planned pension contributions for 2009, and preferred membership units issued with Adelphia Acquisition. Preferreds did not have major terms except that holders must give approval for sale of subsidiary or company.

*Shares outst inlude additional 30 million of options and RSU outstanding



Notes: 1.)As of December 31, 2008, 79 million shares were available for future grants of TWC stock options at exercise prices of $36.80.


2.)During February 2009, TWC issued approximately 6.3  million options to employees under the 2006 Plan at a grant date fair value ranging from $7.06 to $7.22 per option. (pre-reverse-split). As of December 31, 2008, the intrinsic value of unvested TWC RSU awards was $101 million. Total unrecognized compensation cost related to unvested TWC RSU awards as of December 31, 2008, without taking into account expected forfeitures, is $82 million and is expected to be recognized over a

weighted-average period of three years. The fair value of TWC RSU awards that vested during the year was$4 million in 2008 and immaterial in 2007. During February 2009, TWC issued approximately 3.5 million RSUs to employees under the 2006 Plan at a grant date fair value of $18.14 per RSU. (pre -reverse-split)


The Company made $400 million of discretionary cash contributions to its funded defined benefit pension plans during the year ended December 31, 2008, and subject to market conditions and other considerations, the Company expects to make additional discretionary cash contributions of at least $150 million to its defined benefit pension plans during 2009.


There were pretax impairment on cable franchise rights of $14.822 billion as of Dec 31 2008.


Some litigations outstanding.  My subjective view of the description of the litigation does not scare me with any potential huge liabilities.  




-Delevering of balance sheet

-15% growth of cash flow in 2009

-Industry continues to grow as recession gets people to stay home more and watch TV

-Management has been unleashed to do their thing after spin-off

-Potential beneficiary in a consolidating industry.

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