Why Omega Advisors establishes position in Time Warner Cable

Smita Nair

Overview: Omega Advisors discloses new positions in 1Q14 (Part 4 of 6)

(Continued from Part 3)

Omega Advisors and Time Warner Cable

Leon G. Cooperman’s Omega Advisors added new positions in Dollar General (DG), ADT Corp. (ADT), and Time Warner Cable (TWC). Top positions sold were T-Mobile U.S. (TMUS) and General Motors (GM).

Omega’s 13F filing revealed that it initiated a 0.97% position in Time Warner Cable (TWC) in 1Q14.

TWC is among the largest providers of video, high-speed data, and voice services in the U.S., with well-clustered cable systems located mainly in five geographic areas—New York state (including New York City), the Carolinas, the Midwest (including Ohio, Kentucky, and Wisconsin), southern California (including Los Angeles), and Texas. As of March 31, 2014, TWC had approximately 15.2 million customers who subscribed to one or more of its video, high-speed data, and voice services. During 2013, TWC’s revenue increased 3.4% to approximately $22.1 billion.

Comcast forges deal with Charter to secure TWC merger approval

Comcast (CMCSA) agreed to buy TWC in February for ~$45.2 billion in a deal that would create the largest cable provider in the U.S., with more than 33 million subscribers. Upon completion of the merger, all of the outstanding shares of TWC will be cancelled. Each issued and outstanding share will be converted into the right to receive 2.875 shares of Class A common stock of Comcast. The deal, which is expected to close by the end of 2014, is being scrutinized by the U.S. Department of Justice and the Federal Communications Commission.

According to the release, TWC will combine its products and services with Comcast’s, including StartOver, which allows customers to restart a live program in progress to the beginning, and LookBack, which allows customers to watch programs up to three days after they air live, all without a DVR. TWC will also combine its more than 30,000 community Wi-Fi hotspots, primarily in Los Angeles and New York City, and its in-home management system, IntelligentHome, with Comcast’s offerings.

In order to win approval for the merger and keep its market share below 30%, Comcast forged a complex deal in April with Charter Communications (CHTR), which earlier this year saw its takeover bid rebuffed by TWC. Under the deal, Charter will acquire approximately 1.4 million existing TWC subscribers following the close of the Comcast-TWC merger. In addition, Charter and Comcast will swap ~1.6 million customers. Charter, through a tax free reorganization, will form a new holding company (New Charter) that will own 100% of itself. Charter will also acquire ~33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving ~2.5 million customers (SpinCo). With this, Comcast’s managed residential subscribers will be below 30% of the total multichannel video programming distributor (or MVPD) subscribers in the United States.

TWC earnings beats estimates in 1Q14, but misses on revenue

TWC beat on earnings, but missed on revenue estimates for its 1Q14 results. 1Q14 revenue grew 2% year-over-year (or YoY), driven primarily by growth of 24.4% in business services revenue and 10.8% growth in residential high-speed data revenue. Net income was $479 million, or $1.71 per basic common share, up from $401 million, or $1.35 per basic common share.

Growth driven by increase in high-speed data subscribers

Residential Services revenue declined as a result of decreases in video and voice revenue, but benefited from increases in the number of high-speed data subscribers and growth in revenue per subscriber. As of March 31, 2014, TWC served 14.5 million residential service customers and generated approximately $4.6 billion of revenue from the provision of residential services—which represented 81.8% of its total revenue. TWC expects that its video programming costs as a percentage of video revenue will continue to increase, in part due to an increasingly competitive environment.

Business Services revenue growth was primarily due to increases in high-speed data and voice subscribers, organic growth in cell tower backhaul revenue, and $29 million of revenue from fiber optic network company DukeNet, which was acquired in December last year. Revenue increased 24.4% to $668 million, which represented 12% of TWC’s total revenue. The company expects continued strong growth in Business Services revenue driven by an increase in the number of customers and revenue per customer. As of March 31, 2014, TWC had 637,000 business customers.

Other operations revenue increased to $400 million. Advertising revenue increased primarily due to growth in political advertising revenue as well as non-political advertising revenue from advertising inventory sold on behalf of other video distributors. Other revenue increased primarily due to affiliate fees from the Residential Services segment as well as other distributors of the Los Angeles regional sports networks.

Analysts expect increased consolidation in the media space

An editorial in the New York Times recently called for blocking the Comcast-TWC merger because it will lead to “too much market power in the hands of one company.” Analysts expect increasing consolidation in the media space with AT&T recently announcing a $49 billion acquisition of satellite TV giant DirectTV. Sprint (S) has shown interest in merging with T-Mobile (TMUS), while Verizon (VZ), which acquired 45% stake in Verizon Wireless from Vodafone, denied rumors it was looking at buying DirecTV’s rival Dish Network (DISH).

For the latest on the DirectTV acquisition, please read Merger must-know: Why did AT&T bid to acquire DirecTV? on the Market Realist website.

Continue to Part 5

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