Time Warner Cable Targets Cox - Analyst Blog

According to Reuter, Time Warner Cable Inc. (TWC), the second largest cable MSO in the U.S. may enter into an agreement with privately-held cable operator Cox Communications, for mutual co-operation of their respective cable systems in California . The cable systems are roughly worth $2 billion and will help both the companies reduce their operating costs such as customer servicing costs. The agreement may also expand to cover more geographic locations.
 
However, it is also rumored that Time Warner Cable may also acquire the entire cable business of Cox Communications if the Cox Family, the owner of the company decides to quit. Long back in December 2009, Time Warner Cable management asserted that the company may try to acquire rival cable TV operators in order to consolidate its position in the industry as well as to become more competitive for its major rival Comcast Corp. (CMCSA).
 
The company has decided to remain a pure play content distribution platform and has no plans to acquire any content producing company. Investing in high-speed Internet and the commercial business will remain the major growth initiative of Time Warner Cable. Rival cable operator, Comcast, on the other hand, has acquired ownership stake of NBC Universal from General Electric Co. (GE) which is awaiting regulatory approval.
 
We believe the acquisition of a cable competitor or a part of it is a step in the right direction for Time Warner Cable. Like other cable MSOs, the company is losing subscribers gradually in its basic video segment. This was mainly due to competition from fiber-based networks of large telecom carriers, satellite TV operators, and newly developed Internet-based video operators.
 
At the end of the second quarter 2010, Time Warner Cable had nearly 12.71 million basic video customers. Together with Cox Communications, this figure may go up to 20 million, closer to 23.2 million customers of Comcast and will exceed over 18 million subscribers of the largest satellite TV operator DIRECTV (DTV). Cost synergies will help the company improve its operating margin. Furthermore, a strong subscriber base will increase Time Warner Cable’s bargaining power with respect to several cable and broadcast channel owners.
 
We maintain our long-term Neutral recommendation for Time Warner Cable. Currently it is a Zacks #3 Rank (Hold) stock.