Time Warner Cable Inc. , the second largest cable multi service operator (MSO) in the U.S., has made a bid to acquire Cablevision Systems Corp.’s business unit – Optimum West. The acquisition will make Time Warner Cable a key player in four distinct US markets.
If the cable MSO succeeds in buying Optimum West then it could add up to 300,000 cable customers in Montana, Wyoming Colorado and Utah. However, none of the companies have disclosed the financial details of the deal, which is expected to be reached either in January or February 2013.
In 2010, Cablevision Systems had purchased a controlling stake in smaller cable rival Bresnan Systems from Providence Equity Partners for a total consideration of $1.37 billion and renamed it as Optimum West. However, since November 2012, the company has been trying to sell the cable assets, attracting the interest of several bidders in due course.
According to Bloomberg, other than Time Warner Cable, currently there are two more potential bidders for the cable firm, which include Charter Communications Inc. (CHTR - Analyst Report) and Suddenlink Communications. The deal, if completed, will be the second acquisition by Time Warner Cable in quick succession after it acquired Insight Communications for $3 billion, eventually adding 760,000 cable customers in Indiana, Kentucky and Ohio.
At the end of the third quarter of 2012, the company’s Residential Video subscribers’ base was 12.159 million. Time Warner Cable lost nearly 140,000 residential video subscribers in the previous quarter amidst stiff competition from telecom service providers like Verizon Communication Inc. (VZ - Analyst Report) and AT&T Inc. (T - Analyst Report) , which are capturing market share from cable MSOs by offering fiber-based TV to its subscribers. Furthermore, they are also facing challenges from the non-cable operators, which provide live video streaming services over the Internet.
We believe bidding for the cable firm is a strategic move by the company to revamp its falling pay TV business. Apart from enhancing the company’s impressive customer base, the acquisition of Optimum West business could also boost its top line. On the flip side, continuous acquisitions could increase the company’s leverage, which in turn could hurt its margin.
We retain our long-term Neutral recommendation on Time Warner Cable Inc. Also, it has a Zacks #3 Rank, implying a short-term Hold rating.