Why falling subscribers spark buyout talks for Time Warner Cable



Consolidation talk picks up

On Friday, November 22, 2013, news emerged that Comcast (CMCSA) was interested in a potential purchase of rival cable provider Time Warner Cable (TWC). After months of speculation that Charter Communications (CHTR) was pursuing a similar buyout, this news brought to light the potential for a competing bid for Time Warner, leading to a 10% spike in TWC shares to a new 52-week high of $132.92. All three companies belong to the iShares U.S. Consumer Services ETF (IYC), which tracks the performance of the Dow Jones U.S. Consumer Services Index.

Poor performance attracts buyers

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Merger activity can heat up in a particular industry for various reasons, such as poor overall growth prospects for the industry, underperformance by one player within the industry, or opportunities to grow profitability through synergies. Consolidation expectations within the cable TV industry have begun to heat up due to all three of these drivers.

In particular, Time Warner Cable has received the greatest interest from potential suitors, as the company lags the overall industry in terms of growth and subscriber trends.

Since the beginning of 2010, Time Warner Cable has lost a total of 2.05 million video subscribers, or approximately 16% of the subscriber base. The trend has only accelerated recently, as customers were repulsed by several price increases over the last year and by a public battle with CBS that led to a month-long blackout of the station. In the most recent quarter, Time Warner lost a record 306,000 subscribers, or 2.6% of the subscriber base. In the first three quarters of 2013, revenue from video subscriptions declined 3.5% to $7.95 billion, compared to the same period last year. The loss of subscribers also led management to reduce its forecast for full-year 2013 total revenue growth to between just 3% and 3.5%, down from the previous forecast of 4% to 5% growth. CFO Arthur Minson stated, “We expect that [the] Q4 financial impact from lower Q3 subscribers… will result in a full year reported revenue growth rate of 3% to 3.5%, somewhat lower than previously anticipated.”

These poor results and general underperformance entice potential buyers such as Charter and Comcast, who hope they can turn around the operations of the struggling cable operator and grow value over time. Shareholders in turn expect a potential bid to carry a premium, as they believe their shares would be worth more to a potential acquirer. However, as we saw in Part 1 of this series, it’s yet to be seen if a merger is even possible—meaning the spike in TWC shares may prove fleeting.


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