The jury is still out on Time Warner Cable, but the first month of trading in newly issued shares of the nation’s second-largest MSO offered little comfort to bulls. Having traded as high as $44 on a when-issued basis in February, the share price slid steadily into the mid $30s after it hit the Big Board March 1. For months, Pali Research media and cable analyst Richard Greenfield has been among the Street’s few cautionary voices. We spoke with him shortly after TWC issued its first financial guidance as a separate public company.
You’ve written that Time Warner Cable is trading at an unwarranted premium. What do you see that the market and more bullish analysts are overlooking?
Richard Greenfield: Obviously, from an EBITDA standpoint, it’s no longer trading at a premium; [based on] free cash flow it continues to trade at a premium. While Time Warner’s free cash flow is going to grow rapidly over the next several years, there are other cable operators out there with better free cash flow dynamics where [investors] don’t have to wait as long for the reward of free cash flow: namely Cablevision and even Comcast. Time Warner has a lot of spending to do to fix Adelphia and to roll out new services like voice in the Adelphia systems, and it’s just going to take longer. Yet the actual growth rates that are going to be seen, in terms of revenues and EBITDA, do not appear to be materially different than what the peer group appears to be showing. So you’re paying for similar growth at a more expensive valuation.
You also have the underlying problem that you have a tremendous amount of stock—all of the initial public stock—was in the hands of bond holders who, at least half of them, are unlikely to want to own public company equity for an extended period of time. And so a rotation in the shareholder base, combined with disappointing growth guidance, at least on the EBITDA side… There’s a lot of work to do on these [acquired] systems. It’s certainly not an immediate fix. I think there are a lot of good quality assets within Time Warner Cable, although I would point out that in Cablevision you get purely New York. In Comcast you get an overwhelming percentage of the overall company in top 10, top 20 markets. Time Warner, while they certainly have dominance in New York and L.A., there’s a lot of their systems that are in lesser DMAs—very big clusters, but lesser DMAs. I think there’s definitely a value to the strength of the DMAs that are hit by both Cablevision and Comcast that warrant premium valuations.
You’ve noted that it will take time for Time Warner to fully integrate its acquired systems in Los Angeles. What are the challenges there?
Greenfield: L.A. is obviously very different than New York. It’s not like the island of Manhattan is for Time Warner. [L.A.] is a very broad market, very far reaching. It’s not this simple to integrate. I think it’s going to be in many ways potentially even more difficult than Houston was to integrate, and it’s been ravaged by competition for an extended period of time, throughout multiple ownerships and certainly the Adelphia portion through an extended bankruptcy period. So it’s going to take time to improve it. Dallas I certainly think will be difficult too. Just the fact that L.A. is just a combination of so many [companies’] systems make it, in essence, inherently difficult.
I think they’ll do it. This is not about will they be successful. This is merely a reflection of growth relative to value, versus what else you could buy out there.
Relative to time as well?
Greenfield: Exactly. I also think there is [another] benefit to Comcast. Comcast has had a decade plus—really two decades—of focus on integrating acquisitions. This Time Warner management, clearly this is new to them. Not that they won’t be successful, but this has certainly not been their focus. Their priority has certainly not been integrating acquisitions the way it has been for Comcast.
How about TWC’s prospects in the small to medium-size business market?
Greenfield: I think it’s too early to know for anyone.
One of the key questions you’ve identified for Time Warner Cable management is its use of cash. How do you see that playing out among paying dividends, repurchasing stock or acquisitions?
Greenfield: I think that’s a great question. It sounds like from the guidance call they’re not going to be looking to ramp up share repurchase. It’s already a relatively small float, given the size of the company. I’m hard-pressed to believe that they’re going to push Time Warner’s [86%] ownership up. My guess is that they’re going to use their liquidity to make acquisitions. And if they’re going to make acquisitions, I want to own the company’s assets that they want to acquire. Therefore, we have a buy rating on Cablevision, and we have a buy rating on Charter. Some of those Charter assets, whether they be in L.A. or Dallas, over time could be very interesting. So I’d rather own those than own Time Warner Cable. Again, not that Time Warner Cable is a bad company. I just think they’re going to be an acquirer as they try to build scale toward Comcast levels, and I’d rather own who’s going to be acquired in that process.
Because the acquirer typically pays a premium?
Time Warner Cable Stock Stumbles Out of Starting Gate
Rob Garretson is a business and technology writer based in Gaithersburg, Md.