Time Warner Cable Inc. (TWC) is opting for acquisition path to counter the gradual fall of its core video customer base. Yesterday, the company entered into a definitive agreement to acquire privately held Insight Communications Company Inc. for $3 billion in cash. Insight is a pay-TV operator in the Midwest U.S., Indiana, Kentucky and Ohio, offering triple-play bundled video, telephony, and data services. The deal is subject to the regulatory approval.
The Synergies
(1) Insight has more than 750,000 customers, who subscribes to one or more than one of its offerings. In particular, the company has approximately 537,000 high-speed data subscribers, 679,000 video subscribers, and 297,000 telephony subscribers. This solid customer base will effectively complement Time Warner Cable dwindling video customer base, which lost a massive 130,000 subscribers in the previous quarter. Acquisition of Insight will provide the necessary economies of scale to Time Warner Cable, which, in turn will enable the company to bargain hard with TV channels (content developers) for fees.
(2) Insight already invested substantially for network including digital conversion and high-speed DOCSIS 3.0 implementation. Time Warner Cable is aggressively rolling-out next-generation DOCSIS 3.0 (also called Wideband) service. Management declared that its total footprint will be converted into all digital setup within next 5 years. DOCSIS 3.0 currently covers 60% of its subscribers, which will be fully completed by the end of 2012. The merged entity will therefore become a huge technologically superior cable operator.
(3) Time Warner Cable already declared that after incurring onetime costs and capital expenditures, the Insight acquisition will result into annual cost synergies of around $100 million, mainly through programming expenses reduction. Most of these cost savings will be realized within the first two years after the completion of the acquisition.
Our Assessment
Time Warner Cable reported strong financial results for second-quarter 2011. Despite this, we remain highly concerned regarding massive video subscriber loss of the company. The U.S. pay-TV industry is at present facing significant challenges from several fronts. Prolonged economic volatility in the U.S., growing competitive threat from fiber-based TV services of telecom operators, AT&T (T) and Verizon Communications Inc. (VZ), and availability of cheaper online video streaming services, such as Netflix Inc. (NFLX), Hulu, uTube, etc. have imposed mounting pressure on the traditional pay-TV operators, and Time Warner Cable is no exception.
In this juncture, acquisition of Insight will consolidate Time Warner Cable’s market position. Effective acquisition coupled with ongoing shareholders’ return (share buyback and dividend payment) policy may boost the stock price in future. We maintain our long-term Neutral recommendation on Time Warner Cable. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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