Morgan Stanley and UBS Face-Off on Time Warner Deal

In separate reports, Morgan Stanley analyst Benjamin Swinburne and UBS analyst John Hodulik examine possible

and

deals with

. Morgan Stanley reports that Comcast's interest in Time Warner "may be a stronger suitor." Swinburne noted that Charter has meaningful tax assets and "smaller transactions would have less of an impact on driving long-term FCF." Despite these benefits, the analyst commented that Comcast's partnership has three "notable attractive elements." Swinburne wrote, "(1) Credit for synergies – Charter's turnaround in the last year has been notable, but it has just now reached the level of top line growth Comcast has been delivering for years. (2) PF leverage - Comcast has the capacity to offer a largely cash deal without pushing leverage above TWC's 3.25x comfort range, compared to TWC/CHTR where leverage likely lands 4-5x. 3) For Comcast, its current stated path to de-lever to 1.5-2x gross leverage is a drag on equity returns, and more leverage in an accretive (10-15% on FCF/share) deal for TWC would likely lift shares." On the other side of the rink, UBS' John Hodulik commented that a Charter deal with Time Warner is most likely and that the reports on Comcast may be in an effort to get a higher price. Although the analyst noted that a deal with Comcast could have higher synergies, he points out that there is greater regulatory risk related with their larger subscriber base. Hodulik wrote, "In our 7/9/13 note, "Consolidation to Drive Stocks Higher," we estimated Charter could pay ~$150 per share for TWC. Given the $20 move in Charter shares, we now expect the company could pay ~$160, roughly 8.5x our 2015 EBITDA estimate. We believe a deal would bring $1B in annualized operating synergies as a base case and continue to assume the combined company could carry 5x leverage. With these assumptions, we estimate a deal would be slightly accretive to FCF per share in 2015E." There is the possibility of a joint bid for Time Warner Cable. UBS analyst Hodulik noted that a joint bid would be "significantly more complicated and it is unclear why Charter would be interested in that scenario."