Weekly Pay-TV Notes: Time Warner Cable Shareholders Set To Vote On Charter Deal, FCC Cancels Dish’s Auction Discount

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The pay-TV industry saw significant activity this week, with Time Warner Cable calling for a special meeting of shareholders on September 21 to vote on its planned merger with Charter Communications. On a separate note, FCC chairman Tom Wheeler released a statement which stated that the commission has decided to cancel the discount of $3.3 billion that Dish Network received during the last AWS-3 auction. On that note, we discuss below these developments related to the pay-TV companies over the past few days.

Time Warner Cable Sets Shareholder Meeting To Vote On Planned Merger With Charter

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According to a recent Time Warner Cable (NYSE:TWC) SEC filing, the company has called for a special meeting of shareholders on September 21 in order to vote on its planned merger with Charter Communications (NASDAQ:CHTR). [1] All shareholders of record as of July 28 will be eligible to cast their votes on the merger plans. Charter is organizing a separate vote on the same day on the same topic. Both companies have stated that the deal can only be completed if the merger is approved by a majority of their shareholders. We expect that the merger plan will win shareholder approval as the deal is beneficial to both companies. The merger will help the companies compete better in a cable communications industry that is currently undergoing a consolidation phase.

Time Warner Cable and Charter had announced last May that they had entered into a definitive agreement to merge. [2] Charter is a leading internet communications company and the fourth-largest cable operator in the U.S. The deal values Time Warner Cable’s stock at $195.71/share, which gives the company an enterprise value of $78.7 billion. [3]. Charter will provide $100 in cash and the rest in shares of a new public parent company, tentatively called “New Charter”, for each Time Warner Cable share outstanding. Charter had earlier agreed to buy Bright House Networks and the Syracuse-based company will also be a part of New Charter. The deal is currently under review by the FCC and the companies expect the deal to close by the end of the year.

Time Warner Cable’s stock gained around 1% over the week through Thursday. We currently have a price estimate of $198 for Time Warner Cable. For the year 2015, we estimate revenues of $23.7 billion, in line with the consensus estimate, and EPS of $6.86, compared to a consensus estimate of $6.61.

FCC Cancels Dish’s $3.3 Billion AWS-3 Auction Discount

As expected, the FCC has decided to cancel the discount of $3.3 billion that Dish Network (NASDAQ:DISH) received during Auction 97. FCC chairman Tome Wheeler released a statement which stated that the small business bidding credit rule was meant to “give bona fide small businesses an opportunity to acquire valuable spectrum” and that Dish’s bidding entities are “in fact are not eligible for bidding credits.” The issue of the discount received by Dish first came to light after the results for the FCC’s Auction 97 came out. Dish spent close to $10 billion at the auction and acquired 25 MHz of AWS-3 wireless spectrum. [4] However, the company also received a discount of 25% (approximately $3.3 billion) as it bid through small partners Northstar and SNR. The FCC’s latest decision essentially means that Dish will have to shell out an additional $3.3 billion if it wants to retain the spectrum it won during the auction.

We had anticipated the cancellation and had revised our price estimate for Dish accordingly. (Read in detail – Why We Are Revising Dish Network’s Price Estimate To $74) The cancellation of the discount comes as a severe setback for Dish. CEO Charlie Ergen stated on the latest earnings call that such a cancellation might derail the company’s future plans. [5] We believe that incurring an additional liability to the tune of $3.3 billion could stall future M&A activity and cripple Dish’s plans to bid for spectrum at future auctions.

Dish Network’s stock declined around 4.6% over the week through Thursday. We currently have a price estimate of $74 for Dish Network. For the year 2015, we estimate revenues of $15.1 billion, in line with the consensus estimate, and EPS of $2.11, compared to a consensus estimate of $2.18.

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Notes:
  1. Charter, TWC Set Special Shareholder Meeting Date, August 20, 2015, Multichannel News []
  2. Charter Communications to Merge with Time Warner Cable and Acquire Bright House Networks, May 26, 2015, Time Warner Cable Press Release []
  3. Time Warner Cable’s SEC Filings []
  4. AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, January 30, 2015, Fierce Wireless []
  5. DISH Network (DISH) Charles William Ergen on Q2 2015 Results – Earnings Call Transcript, August 5, 2015, Seeking Alpha []