Is a Charter Communications Buyout Being Overly Forced?

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Charter Communications Inc. (NASDAQ: CHTR) may have a checkered past, but the cable television service provider likely will be next on the block of the cable and TV media mergers. Time Warner Cable Inc. (NYSE: TWC) appears to be the leading candidate, but we would stress that the rumor mill is wishy-washy, and we would not be surprised at this point by any such deal nor by any partner in the space.

Advisory note: Literally as we were editing this story, news broke that Cox Communications may now be interested in a deal with Charter as well. The news sent shares of Time Warner Cable down enough that its stock triggered a circuit-breaker trading halt.

The real wild card comes into play with Liberty Media Corp. (NASDAQ: LMCA). Liberty is run by Greg Maffei and is under the John Malone empire, and this group owns roughly 27% of Charter Communications. Liberty is pushing for a merger to occur, and the market speculation is that Time Warner is the most likely merger partner. Liberty also has so many irons in the fire in other media plays that consolidating makes sense. The question is whether Liberty would get bought out or it would just become a holder of the larger NewCo parent.

Now here comes another wild card. Valuations have to be addressed. Charter has a market value of almost $13 billion, which is more than one-third of the near-$35 billion market cap for Time Warner Cable. We wonder if Comcast Corp. (NASDAQ: CMCSA) would try to step in too, but Comcast has been absorbing the NBC deal, and it is possible that regulators might have an issue with Comcast gobbling up more subscribers when its market cap is $120 billion.

The biggest hook is Charter’s expected profitability, alone and integrated. Perhaps it can operate its books better under the Time Warner back offices and infrastructure. Our own initial concern on Charter’s valuation is that it trades at literally more than 50 times its expected 2014 earnings estimates. Time Warner Cable trades at close to 16 times expected 2014 earnings, versus a multiple of just over 16 times for Comcast. An easy objection here is that buying Charter Communications could be highly dilutive to earnings for 2014, 2015 and perhaps even 2016.

This integration and merger process also might take longer than expected to close because integrating cable systems, networks, programming, communications providers and the employees and management teams is not exactly just a flip of a switch. After all, most cable TV companies now are not just in the cable TV business. They are now in the Internet service provider and telecom businesses, and they are facing competition from telecom giants, satellite providers and even from Web-only service providers that are changing the historical business models.

Charter Communications is expected to report earnings next week. It is at that point that we would begin to expect to hear more rumbling of a deal. Charter is the fourth-largest cable operator in the United States, with approximately 5.2 million residential and business customers in 25 states.

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