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Time Warner Cable Inc. (TWC - Analyst Report), the second largest cable multi service operator (MSO) in the U.S., has inked a deal with DirecTV (DTV - Analyst Report). The deal will allow the largest U.S. satellite TV provider to broadcast the cable MSO’s two sports network in the Los Angeles (LA) area. The deal could be significantly beneficial for Time Warner as DirecTV is one of the biggest pay TV distributors in California with a customer base of about 1.2 million.

On October 1, 2012, Time Warner launched two new sports channels – Time Warner cable SportsNet and Time Warner Cable Deportes – that broadcast the LA Lakers basketball games in addition to games from LA galaxy soccer teams and LA Sparks Women Basketball team.

Last year, Time Warner cable paid about $2 billion to gain broadcasting rights of LA basketball games for 20 years. DirecTV became the fifth company to ink such a deal with the cable MSO, who earlier announced similar deals with Cox Communications, Verizon Communications Inc. (VZ - Analyst Report), AT&T Inc. (T - Analyst Report) and Charter Communications Inc. (CHTR - Analyst Report).

The deal puts DirecTV in a winning position against arch rival Dish network, still negotiating with Time Warner cable over a possible deal. The deal will allow the DirecTV customers to connect better with their teams as Time Warners’ exclusive partnership with LA teams allow it to provide in depth team analysis and behind-the-scenes coverage unlike ever before.

Sports entertainment has become the most expensive form of programming with nationwide sports channel charging as much as $5 per subscriber while regional sports channel is charging only $2-$3 from their customers.  

New York-based Time Warner is negotiating with various pay TV firms to offer the two sports entertainment channels and is looking for a monthly average fee of $3.95 per subscriber. We believe such deals will allow Time Warner Cable to cover its hefty contract fees and at the same time hedge its escalating programming cost by offering these less expensive regional sports network.    

We maintain our long-term Neutral recommendation on Time Warner Cable. The company also retains a Zacks #3 Rank, implying a short-term Hold rating.

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