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If John Malone Doesn’t Buy Time Warner Cable, Someone Else Will

If TWC wants to survive, it needs to get bigger

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Stick a fork in Time Warner Cable (TWC). The second-largest cable company is done.

The company picked a fight — noble that it might have been — with CBS (CBS) over retransmission fees that it couldn’t win. So if media tycoon John Malone shows up with an offer, TWC should take it and head for the exits.

Time Warner Cable Getting Bigger, One Way or Another

Rumors that Malone will make a bid for Time Warner Cable by the end of the year caused shares of the New York-based company to jump about 3% in trading last Friday. It also rose briefly Monday after Deutsche Bank analyst Brian Russo raised his rating on the stock to a “buy,” saying a merger with Charter Communications (CHTR) is “more likely than not.” Time Warner has so far rebuffed Malone’s overtures, according to media reports.

Odds are that Russo’s prediction will come to pass.

As the Los Angeles Times and others noted, combining Charter and Time Warner Cable would create the second-largest cable company, serving 17 million customers. A larger company might be better able to stand up to content companies as they continue to try to pass on their rising costs for programming, especially for sports. By joining forces, the two companies also might be able to counter the rising power of new entrants in the media sector such as Amazon (AMZN) and Netflix (NFLX). Considering all the challenges facing the industry, every little bit would help.

Of course, even if a merger with Charter falls through, Time Warner Cable — which has a big foothold in major cities such as Los Angeles — might attract a private equity buyer or perhaps a media conglomerate. That’s because even a weakened cable company earns quit a bit of money. Free cash flow — a key metric for these buyers — rose 4% to $440 million in the latest quarter. TWC expects to generate $2.5 billion in cash this year, which isn’t too shabby.

Why TWC Should Buy … or Sell

Otherwise, Time Warner Cable’s options for growth are severely limited.

Its doubtful that federal antitrust regulators would ever allow Comcast (CMCSA) to buy the company because some might argue it would restrict competition. The company might be able to acquire Cablevision (CVC) if the Dolan family, which controls the smaller cable company, would sell. But that seems unlikely.

Average 52-week price targets on the stock are only a couple dollars ahead of current prices. Nonetheless, some analysts think Time Warner Cable stock has more room to run. Deutsche Bank’s Russo, for instance, recently raised his price target to $141 — a 14% upside to current prices. I also think TWC presents a buying opportunity, considering its weakened state.

Article printed from InvestorPlace Media,

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