In Comcast deal, victor isn't necessarily a winner

AP News
Posted: Feb 13, 2014 5:50 PM

NEW YORK (AP) — There's nothing like a bidding war to turn the stock of a lackluster company into a star.

Shareholders of Time Warner Cable, which has been losing video customers, are big winners after rival Comcast agreed to buy the company for a nice premium. Whether Comcast owners will see any benefit is less certain.

For owners of Time Warner Cable, it's been a year of profitable courtships. Before Comcast swept in, another Time Warner Cable rival, Charter Communications, made several sweetened offers for the struggling company, helping boost its stock 67 percent in the past 12 months.

"The premiums have built over time," says analyst Nick Del Deo of MoffettNathanson Research, despite what he calls "lackluster results."

Time Warner Cable lost 833,000 video customers last year, after dropping nearly a million the previous two years. It's a "turnaround project," said would-be buyer Charter last month. Time Warner Cable apparently agrees, with its chief financial officer calling last year's results "dismal." The company recently unveiled a $3.7 billion spending program to upgrade its network and attract more customers.

To which the optimists retort: Bad results leave plenty of room for improvement. In that sense, they are good.

Some financial analysts noted Thursday that the greater heft of a combined Comcast-Time Warner Cable would help drive sales of "triple-play" packages. Those packages combine Internet, cable and phone service. A bigger company would also give the company move leverage in negotiating deals over how much to pay Disney, Viacom and other content providers.

Comcast forecasts it can cut $1.9 billion in various costs over three years.

And there's the rub. Del Deo of MoffettNathanson says such savings are equivalent to 10 percent of Time Warner Cable's costs, an ambitious target.

The projected savings are no small matter. Including the savings, Comcast's $45 billion deal values Time Warner Cable at about 6.7 times Time Warner Cable's projected annual cash flow, a reasonable valuation. If you don't count the savings, Comcast's offer values Time Warner Cable at a much richer 8.2 times.

In the deal, Comcast is paying $158.82 per share for Time Warner Cable, about 17 percent above that stock's Wednesday closing price of $135.31. On Thursday, Time Warner Cable's stock rose 7 percent to $144.81.

As for Comcast, investors were less enthusiastic. All the bullish talk about the deal may turn out to be correct. But so far, the stock is sinking. On Thursday, Comcast fell 4 percent to $52.97.