A lot of investors seem to think so after the No. 2 cable operator reported yesterday that it lost a startling number of video customers in Q3, the period that included the 32-day blackout of CBS stations and channels. Despite the bad news, Time Warner Cable shares rose 2.7% yesterday and are up another 1.1% so far today. Brean Capital’s Todd Mitchell explains why today in a devastating take-down of TWC: The probability “is high” that TWC will soon be part of a mega-merger — likely with Charter Communications, where its top shareholder, Liberty Media’s John Malone, has been evangelizing for consolidation. “The market wants it,” Mitchell says, “and TWC’s abysmal operating metrics are a solid argument that it is time for someone new at the helm.” He says that the company’s problems run far deeper than its brief run-in with CBS. “We think TWC has been deferring investment in order to keep capital returns high and keep its stock up to resist acquisition overtures from Charter.” That’s especially evident in video, where TWC offers “an inferior product,” he says. TWC “is clearly going to need to invest in enhancing its video service profile, and that is going to cut into capital returns.”
But Charter’s not much better, and “neither operator has been forthright with investors about this.” With growing competition from Verizon, AT&T, DirecTV, and Dish Network, “we do not see how this strategy is sustainable.” Nor does Mitchell believe TWC can continue to dazzle shareholders by repurchasing stock and increasing dividends. That “aggressive capital return strategy … is coming to an end.” As a result he says sophisticated hedge funds and arbitrageurs should keep their TWC shares as they await a deal while other long-term investors who like cable should cash out and invest instead in Comcast which “is years and $000′s of millions ahead of TWC and Charter in its investment in transitioning” to TV Everywhere streaming services.
COO Rob Marcus — who’ll become CEO at year’s end– said yesterday that he has “ambitious plans” to help TWC cultivate “a happier, more stable subscriber base.” He’ll roll out the specifics in an Investor Day meeting next year. But he also indicated that he wouldn’t necessarily oppose a merger. “Any decision on consolidation hinges on just one question, does it maximize value for our shareholders?”