The rumors about consolidation in the pay-TV industry has been in the air recently and late last week Liberty Media, which owns a 27% stake in cable operator Charter Communications, reportedly approached Time Warner Cable (NYSE:TWC) about a merger.  With the rising programming costs and need for upgrading the current systems to match to the technologies offered by other operators such as Google (NASDAQ:GOOG) and Verizon (NYSE:VZ), consolidation seems to be a viable option for cable companies.
A Quick Look At Charter Communications
Not a very popular name, but Charter Communications is the fourth-largest cable operator in the U.S., behind Comcast (NASDAQ:CMCSA), Time Warner Cable and Cox Communications. It provides cable television, high-speed Internet and telephone services.  Liberty Media Corporation owns 27% Of Charter Communications, which it acquired for $2.62 billion earlier this year.  Debt levels are usually high for cable companies. While it is over $26 billion for Time Warner Cable, Charter Communications’ debt of $12 billion is slightly more than its market value. 
What Could A Merger Offer?
What could a marriage between these two companies offer? There could be a handful of benefits. Time Warner Cable has more than 11 million pay-TV subscribers while Charter Communications has over 4 million.  Together they would be the third largest cable operator to compete against the giant Comcast and Verizon. In terms of broadband, which is a seeing fast growth in the U.S., both Time Warner Cable and Charter Communications need to develop their systems in order to compete with the new technologies such as Fios and Google Fiber. A consolidation can help these companies to gather the necessary capital. Another benefit is in terms of reduced programming costs that a merger could bring in. Additionally, there would be tax efficiency as Charter Communications net losses can act as tax shield for the new entity.
While all of that sounds good, there is a bitter part to the story. Charter Communications has some history of its own. In 2007, the company was ranked the worst cable Internet service provider in the U.S.  Later in 2008 and 2009, the company’s triple play bundle was rated the worst among all national carriers.  Again in 2008, during a routine sweep of inactive accounts, Charter accidentally deleted the e-mail accounts of around 14,000 users.  The action was irreversible and the company compensated the affected by giving a $50 credit to their subscription. Moreover, in terms of customer satisfaction, the company is rated the poorest in the U.S. However, Charter Communication has been improving for some time now.
Time Warner Cable has managed to perform well on its own. It has been facing the issue of customer churn in the past few quarters, but that is applicable to the entire industry. In a time when cable giants are aggressively addressing the issue of customer churn and we estimate it to be lower for Comcast going forward, it would be more difficult for other companies to compete in the industry on their own. A consolidation on the other hand can offer multiple benefits. The rumors about a marriage between Time Warner Cable and Charter Communications may or may not take place, but it is clear that a consolidation in the industry is feasible and can help the companies compete better against the mammoth Comcast and Verizon.
Our price estimate for Time Warner Cable stands at $89 is roughly at 10% discount to the market price.Notes:
- Charter Communications Reviewing Acquisition Targets, CNBC, Jun 14, 2013 [↩]
- Charter Communications SEC Filings [↩]
- Charter Communications and Liberty Media Corporation Announce Agreement for Investment, Liberty Media Press Release, Mar 19, 2013 [↩] [↩]
- Time Warner Cable and Charter Communications SEC Filings [↩]
- The Best and Worst ISPs, PC World, Jun 20, 2007 [↩]
- Charter Cable Rated as Worst Again by Consumer Reports, WSAW, Jan 8, 2013 [↩]
- Charter error deletes 14,000 email accounts, St. Louis Business Journal, Jan 24, 2008 [↩]