Recently, Time Warner Cable Inc (NYSE:TWC) experienced a huge gain of nearly 8% in a single day after an acquisition rumor. According to CNBC, CEO Greg Maffei of Liberty Media Corp (NASDAQ:LMCA) has approached CEO Glen Britt of Time Warner Cable to discuss about the potential merger with Charter Communications, Inc. (NASDAQ:CHTR). Following the buyout rumor, Charter Communications, Inc. (NASDAQ:CHTR) also rose nearly 5% to $116.60 per share.
Consistent growth but weak balance sheet
Time Warner Cable Inc (NYSE:TWC) has been generating its revenue from providing video, high-speed data, and video services to both residential and business customers. The majority of its revenue, $18.18 billion, was generated from residential services, while business services and advertising contributed only $1.9 billion and $1 billion, respectively, in revenue. Within residential services, video accounted for the majority of revenue with more than $10.9 billion in sales while high-speed data ranked second, with more than $5 billion in sales in 2012.
Time Warner Cable Inc (NYSE:TWC) has managed to consistently increase its residential customer relationship average revenue per user (ARPU) for every month in the first quarter, along with the 6.6% growth in revenue and 8.5% increase in its adjusted diluted EPS. In the first quarter, Time Warner returned as much as $855 million to its shareholders, including $195 million in dividends and $660 million in share repurchases. In the past three years, Time Warner has paid consistently increasing dividends, from $1.60 per share in 2010 to $2.24 per share in 2012. Interestingly, the payout is quite reasonable at only 32.5%.
What makes me worried about Time Warner Cable is its high leverage level. As of March 2013, it had $6.94 billion in equity, nearly $3.3 billion in cash, and as much as $24.2 billion in long-term debt. Moreover, Time Warner Cable Inc (NYSE:TWC) booked an additional $2.3 billion in short-term debt.
According to Business Wire, the company plans to have a good balance between subscriber quality and profitability, as well as subscriber growth and volume metrics. Looking forward, Time Warner Cable Inc (NYSE:TWC) will concentrate its efforts on drawing higher quality and more profitable subscribers and having better residential business retention rates. Time Warner Cable is trading at nearly $103.40 per share with a total market cap of around $30 billion. The market values the company at 6.7 times its EV/EBITDA.
EV/EBITDA represents Enterprise Value/ Earnings Before Interest, Taxes, Depreciation, and Amortization. It takes into account the relationship between the market value, adjusted with cash and debt, and the cash flow position of the company.
Much cheaper than both Charter Communications and Liberty Media
Indeed, Time Warner Cable Inc (NYSE:TWC) is valued at a much cheaper valuation compared to both Liberty Media and Charter Communications. Charter Communications, Inc. (NASDAQ:CHTR) is trading at around $116.60 per share with a total market cap of $11.80 billion. The market values Charter Communications a bit higher, at more than 9 times its EV/EBITDA. Liberty Media Corp (NASDAQ:LMCA) seems to have the highest valuation of the trio. At $125 per share, it is worth more than $15 billion on the market. The market values Liberty Media at more than 23.6 times its EV/EBITDA.