Why Time Warner Cable and Charter Both Rally if They Merge

NEW YORK (TheStreet) -- No matter the chatter, no matter the speculation, shares of Time Warner Cable (TWC) and Charter Communications (CHTR) appear poised to rise. 

Time Warner Cable shares are getting an additional boost following reports that France's Altice ATCEY, hot off its acquisition of Suddenlink, the seventh-largest U.S. cable-TV operator, approached the New York-based Internet-service operator, about a merger. Time Warner Cable has gained nearly 10% since Comcast's (CMCSA) failed bid for a $45.2 billion merger opened the possibility for other bidders. 

Normally, when two companies decide to merge, the acquirer's shares fall while the target's stock rise. But in the case of Time Warner Cable and Charter, both stocks continue to rise even though Charter would technically be considered the acquirer. That's because a merged company may become a more formidable competitor to the largest U.S. broadband operators, AT&T (T), Verizon (VZ) and Comcast (CMCSA), while gaining all the advantages of a larger company.

Charter, which was gaining 0.4% on Thursday to $177.71, was raised to a buy from hold by Matthew Harrigan, a media analyst at Wunderlich Securities, who increased his 12-month price target on the company to $221. Charter, he said, could rise as high as $250 per share if a "still likely considerable [merger and acquisition] kicker" goes into effect.

And kickers in the form of deal-making among U.S. cable-TV operators are likely to accelerate. 

Stamford, CT.-based broadband services provider Charter is advancing its efforts to acquire privately held Bright House Networks, in part because of its customer operations in Los Angeles, while France's Altice (ATCEY), the cable-TV and broadband operator controlled by billionaire Patrick Drahi, is buying St. Louis-based cable-TV operator Suddenlink Communications in a deal valued at $9.1 billion.

Altice has its sights set on expanding its U.S. operations well beyond Suddenlink, CEO Dexter Goei said in a conference call formally announcing the deal. Goei eventually wants Altice's operations to be split evenly between the U.S. and Europe. Such pronouncements can only increase speculation that Altice will make an offer to buy for Time Warner Cable, setting up a bidding war with Charter, which is 26% controlled by billionaire John Malone's Liberty Broadband (LBRDA).

Shares of Time Warner Cable were down 0.1% to $166.32.

"The threat of an alternate acquirer could expedite Charter's plans, though we believe there already was incentive for Charter to act quickly" to acquire Time Warner Cable, Mike McCormack, a media analyst at Jefferies said in an investor note Thursday. Incentives include Time Warner Cable's improving business mix of more broadband customers along with regulator familiarity following the aborted Comcast deal. 

Indeed, Charter's biggest advantage over Altice may be that Time Warner Cable would be reluctant to risk a long and ultimately unsuccessful regulatory process with the foreign-owned Altice after enduring the 14-month failed merger with Comcast.

Additionally, Time Warner Cable is more likely to want Charter shares in a cash and stock deal rather than Altice shares in a similarly structured offer, said Wells Fargo media analyst Marci Ryvicker in a May 20 investor note.

As for Altice, the company is eager to expand beyond Europe.

"Combining Suddenlink with Time Warner Cable is also likely to carry meaningful synergies and provide Altice a greater platform to operate in the U.S.," McCormack wrote. "Net-net, the consolidation theme is likely to continue to favor Time Warner Cable shareholders."

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