Time Warner Cable Inc (TWC), Charter Communications, Inc. (CHTR): How to Play the Potential Cable M&A Deal

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Time Warner Cable Inc (NYSE:TWC)

Recently, Time Warner Cable Inc (NYSE:TWC) has been trading higher on rumors rumor that billionaire John Malone, through Charter Communications, Inc. (NASDAQ:CHTR) would like to take over Time Warner Cable Inc (NYSE:TWC). Charter Communications, Inc. (NASDAQ:CHTR) has also been on the rise after the rumor, climbing from $117.80 per share to as high as $130. If that happens, in the long run, a lot of synergies and benefits will eventually flow to John Malone’s powerhouse, Liberty Media Corp (NASDAQ:LMCA), the 27% stake owner of Charter Communications, Inc. (NASDAQ:CHTR).

Charter Communications, Inc. (NASDAQ:CHTR) to acquire Time Warner Cable Inc (NYSE:TWC)?

Time Warner Cable Inc (NYSE:TWC) is one of the biggest video, high-speed data and voice services providers in the U.S., serving around 15.2 million customers, including 14.7 million residential services customers and 563,000 business services customers. Most of its revenue, $18.18 billion, or 85% of the total, was derived from residential services, while the business services and advertising segments generated only $1.9 billion and $1 billion, respectively, in 2012 sales. In the residential services, the company generated as much as $10.9 billion in Video. High-speed data ranked second with more than $5 billion in 2012 revenue.

Many people have been concerned about the potential synergies between Time Warner Cable Inc (NYSE:TWC) and Charter Communications, Inc. (NASDAQ:CHTR). While Time Warner Cable Inc (NYSE:TWC) concentrates operations in five main areas including New York State, the Carolinas, the Midwest, Southern California and Texas, Charter Communications, Inc. (NASDAQ:CHTR) spreads out across 25 states, with eleven key markets including Michigan, Alabama/Georgia, Michigan, California and Central States. However, it could be a cable industry consolidation deal with potential synergies in both operations and cost savings. Like Time Warner Cable, Charter Communications also derived as much as 48% of its revenue from Video while Internet contributed nearly $1.87 billion, or 25% of total sales in 2012.

If Charter Communications acquired Time Warner Cable, it would have to use a lot more outside equity or debt financing, as it is much smaller than Time Warner Cable. While Time Warner Cable is worth more than $32.7 billion on the market, with 12 million video subscribers, Charter Communications has only four million subscribers, with a market cap of only $12.9 billion. Both Charter Communications and Time Warner Cable had a large amount of debt and quite thin equity. The combined company would be likely to have $37 billion in debt and only around $7 billion in equity. According to Moody’s, John Malone might want to limit his dilution, so the financing for the deal would make the credit risk for bondholders riskier. If John Malone used debt financing for this acquisition, the combined company’s total debt could reach a whopping amount of about $60 billion.

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