Today's Market: Cable Wars Heating Up

Includes: CBS, CHTR, CMCSA, T
by: Matthew Smith

The big news this morning in the market focuses around the cable providers and what appears could be a new wave of consolidation. We have had to continually update this article throughout the morning as new pieces of news have trickled out, but the bottom line is that Time Warner Cable (TWC) appears to be in play with the likely suitors being either Charter Communications (NASDAQ:CHTR) or Comcast (NASDAQ:CMCSA) - with Time Warner Cable rumored to favor Comcast. The change in leadership at Time Warner Cable, along with the fallout from the CBS (NYSE:CBS) fee fight and the poor quarterly results which followed are all reasons why the company finds itself in play, even though it is the second largest player in the industry.

Chart of the Day:

The 10 Year Treasury Yield is rising and finds itself at two month highs. We find this important because although yields are rising, so too is the stock market. If rates rise slowly, then maybe this bull market can continue its move higher unabated.

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • JOLTS - Job Openings (10:00 a.m. EST): Est: N/A

Asian markets finished mixed today:

  • All Ordinaries -- up 0.90%
  • Shanghai Composite -- down 0.43%
  • Nikkei 225 -- up 0.10%
  • NZSE 50 -- down 0.01%
  • Seoul Composite -- up 0.62%

In Europe, markets are trading higher this morning:

  • CAC 40 -- up 0.65%
  • DAX -- up 0.24%
  • FTSE 100 -- up 0.09%
  • OSE -- up 0.32%

Cable Wars Heating Up...

It seems that Charter Communications has not yet given up on its desire to buy larger cable operator Time Warner Cable which has already rebuffed overtures from Charter in the past year. The Wall Street Journal is reporting this morning that Charter Communications has been meeting with large banks in an attempt to line up financing for a possible bid for Time Warner in the not too distant future.

The idea of the much larger Time Warner Cable selling out to the much smaller Charter Communications may seem illogical to some observers, but with John Malone calling the shots at Charter Communications it all makes sense. Mr. Malone is a visionary in the media world and has always wanted to get back into the cable game after having sold his previous company to AT&T (NYSE:T) years ago. His holdings already include many content companies and down the road those could be consolidated under the same umbrella, but right now the focus is on creating a larger cable provider to realize more value for shareholders.

According to the reports, among the banks that Charter has spoken to are Bank of America, Barclays and Deutsche Bank. In order to get the deal done for Time Warner Cable, Charter will need to have a credit facility of billions of dollars so as not to dilute current shareholders (read Mr. Malone's interests) too much.

Even after the recent disappointing news regarding the company's results, Time Warner Cable's stock has remained strong due to takeover speculation relating to Charter Communications.

(Click to enlarge)

Source: Yahoo Finance

Our view is that Time Warner Cable is now vulnerable after their recent spat with CBS which ended up costing the company hundreds of thousands of subscribers when all was said and done. The market was taken aback from that revelation and took notice that the content providers take a hit upfront during negotiations while the cable providers face longer-term effects from subscriber turn. It might have been a costly error on management's part and with some shareholders disappointed with the end results from the CBS fee battle we could see an openness to a deal that is well structured and possessing a respectable premium.

Our favorite play in the cable provider space is Comcast which has both content and cable assets and does not face the same issues that other pure-play cable operators face. CNBC's David Faber is now reporting that Comcast could be a rival bidder for Time Warner Cable as that firm tries to ward off Charter Communications. Time Warner has supposedly indicated to Comcast that Comcast would be their ideal partner in any consolidation and Comcast shareholders are rumored to have voiced support for such a tie-up. This will be interesting to watch play out over the next few weeks and months as both Comcast and Charter have already begun their due diligence processes for a deal with Time Warner.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.