Time Warner, Comcast Tie-up Meant to Gain Leverage over Producers

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The country’s two largest cable operators, Comcast Corp. (NASDAQ: CMCSA) and Time Warner Cable Inc. (NYSE: TWC) have reportedly had discussions in the past few months related to a combination. Time Warner took the lead in an apparent attempt to forestall a bid from Charter Communications Inc. (NASDAQ: CHTR).

Time Warner, the country’s second largest cable operator with some 11.4 million subscribers, apparently prefers a tie-up with Comcast, the country’s biggest cable company with 22 million subscribers. Time Warner has seen the writing on the wall, and so has Charter: only the very large will survive. Time Warner lost 306,000 cable TV subscribers in the third quarter. Comcast lost nearly 130,000 and total cable subscriber numbers are down more than 350,000 compared with last year.

Charter had about 4.2 million residential cable subscribers at the end of the third quarter, a net loss of 143,000 in the past 12 months.

Cable subscriber numbers are down by nearly 10 million since reaching a peak of nearly 67 million in 2001 according to research firm SNL Kagan. Streaming video customer numbers are headed in the other direction, from 14.5 million in 2001 to 46.8 million in 2012, not far behind the 56.4 million total cable customers.

And it’s not just lost subscriber revenue, but lost leverage over content providers. Time Warner blamed its disputes with CBS Corp. (NYSE: CBS) and Journal Communications over retransmission fees for its subscriber losses in the third quarter. Content producers like CBS are demanding higher retransmission payments from cable and satellite providers and dwindling subscriber numbers knock a sizeable chunk off providers’ take.

A number of pay-TV operators have been saying for some time now that the industry needs to consolidate. Charlie Ergen, CEO of Dish Network Corp. (NASDAQ: DISH) has been among the most outspoken on the issue even though he has failed in a number of efforts to consolidate. Competitor DirecTV (NASDAQ: DTV) is not interested in a merger and Ergen’s attempts to acquire either Clearwire or Sprint were utter flops.

The Wall Street Journal cites unnamed sources familiar with the situation as saying that discussions between Time Warner and Comcast have not been formal and that similar talks have taken place occasionally over the past several years. Charter has talked with Bank of America, Barclays, and Deutsche Bank about putting together a financing package presumably to make a bid for Time Warner.

Time Warner’s shares have jumped about 10% on Friday to a new 52-week high of $132.75. The stock’s 52-week low is $84.57.

Shares of Comcast rose to a new 52-week high of $49.15 against a low of $35.90, and Charter’s shares rose about 2% to $129.29 in a 52-week range of $68.44 to $144.02.

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