Morgan Stanley Initiates Charter, Time Warner Cable

Morgan Stanley initiated coverage Thursday on Charter Communications, Inc. CHTR and Time Warner Cable Inc TWC.

Analyst led by Benjamin Swinburne felt that the move towards consolidation would continue and recommended Charter Communications as it had more upside than Time Warner Cable in a potential acquisition.

Swinburne thought a price of $175-$185 for TWC was a “reasonable acquisition expectation,” or approximately an 8.2x NTM EBITDA.

“For Charter, a $180 acquisition price (assuming midpoint of range) financed ~40% with debt leaves the company ~4.5x levered post full run-rate cost synergies and is ~35% accretive to '18E FCF/share, which we think supports a YE15 share price of ~$225 (~20% upside),” Swinburne wrote.

If TWC was not acquired, the analysts thought that it currently traded near fair value. Further, while Time Warner Cable management had not commented publicly on a potential offer from Charter, “Charter has publicly stated it would be interested in TWC if the Comcast transactions did not close.”

Swinburne felt that Charter was “a natural consolidator,” especially in “record low rate environment” combined with “significant FCF capacity.”

Every 1 million subscribers acquired was 5 percent accretive to Charter’s 2016 FCF/share, according to the analysts. “In a no-deal scenario, maintaining a mid 4's leverage target through buybacks would see CHTR buy back cumulatively ~50 percent of its public float through 2018E and generate $18-19 of FCF/share (~$12 fully-taxed). Buying back stock is in some way a synthetic acquisition as Charter is using low cost debt to buy cable equity.”

The firm maintained an Overweight rating and $210 price target on Charter Communications, Inc., which recently traded at $191.50, up 1.70 percent.

Time Warner Cable Inc was rated Equal-weight with a $170 price target and recently traded at $158.00, up 0.09 percent.