Yesterday, Time Warner Cable Inc. (TWC - Analyst Report), the second largest cable MSO (multi service operator) in the U.S., acquired regional fiber-optic network company, DukeNet Communications LLC, for $600 million in cash. DukeNet was a 50-50 joint venture between Duke Energy Corp. (DUK - Analyst Report) and Alinda Capital Partners.
DukeNet has an extensive fiber-optic network of more than 8,700 miles across North and South Carolina and five other states in the southeastern part of the U.S. DukeNet offers data and high-capacity bandwidth services to wireless service providers, data centers, government and enterprise customers. Acquisition of DukeNet will strengthen the Business Service division of Time Warner Cable.
Cable MSOs are facing massive competitive threat from fiber-based TV network of telecom operators, satellite TV 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 revenues from this segment, up 21.8% year over year.
Moreover, Time Warner Cable is incurring mounting programming expenses. In Sep 2013, the company had to settle a deal with media company CBS Corp. (CBS - Analyst Report), with significantly higher programming costs. In contrast, the Business Service division is a high margin one. 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.
Meanwhile, Charter Communications Inc. (CHTR - Analyst Report), the fourth largest cable TV operator in the U.S., is aggressively targeting to acquire Time Warner Cable. However, Time Warner Cable stated that before finalizing any deal it will thoroughly evaluate whether the deal will add sufficient value to its investors. Notably, shareholders of the company have approved the divestiture. Time Warner Cable currently has a Zacks Rank #2 (Buy).