Yesterday, Time Warner Cable Inc. (TWC - Analyst Report) announced its plan to acquire a regional fiber-optic network company, DukeNet Communications LLC, for $600 million in cash. The financial terms of the deal include the repayment of all outstanding debts of DukeNet. North Carolina-based DukeNet is co-owned by Duke Energy Corp. (DUK - Analyst Report) and Alinda Capital Partners, each having a 50% stake. The deal is expected to close by the first quarter of 2014, subject to customary regulatory approval.
DukeNet has an extensive fiber-optic network of more than 8,700 miles across North and South Carolina and five other states in southeastern U.S. DukeNet offers data and high-capacity bandwidth services to wireless service providers, data centers, government and enterprise customers. The proposed acquisition of DukeNet will strengthen the Business Service division of Time Warner Cable.
Despite being the second largest cable MSO (multi service operator) in the U.S. after Comcast Corp. (CMCSA - Analyst Report), the company is suffering from heavy residential video subscriber loss. Cable MSOs are facing massive competitive threat from fiber-based TV network of telecom operators and online video streaming service providers.
In order to counter this threat, cable TV operators are increasingly targeting enterprise customers. Business Service has become the key growth area of Time Warner Cable. In the third quarter of 2013, the company generated $565 million of revenues from this segment, up 21.8% year over year.
Moreover, Time Warner Cable is incurring mounting programming expenses. Last month, the company had to settle a deal with media company CBS Corp. (CBS - Analyst Report) with significantly higher programming costs. In contrast, Business Service division is a high margin one. The proposed acquisition of DukeNet will enable the company to deliver more network services to wireless towers.
In 2011, Time Warner Cable had purchased NaviSite Inc., a cloud-based information service provider, for $230 million to strengthen its Business Service division. Time Warner Cable currently has a Zacks Rank #3 (Hold).