Buckingham: Time Warner Worth $219 On Greater Charter Deal Certainty

Buckingham Research Group’s James Ratcliffe maintained a Neutral rating for Time Warner Cable Inc TWC, while raising the price target from $187 to $219. The analyst commented that the probability of the deal with Charter Communications, Inc. CHTR being approved had improved.

If the deal is successful, Time Warner Cable holders would receive 0.5409 shares of Charter Communications for every share of Time Warner Cable and $100 cash per share. This is worth $224 per share at “our $230 deal success scenario valuation for CHTR,” analyst James Ratcliffe noted.

The deal has a 90 percent probability of completion and is expected to close in late May. “We see a bull case upside on TWC shares of 10% to $224, and bear case downside of (16)% to $170,” Ratcliffe wrote.

The 2016 total net adds expectation has been raised by 445K to 1.5M. While the 2016 total revenue estimate is unchanged at $25.2 billion, the full-year EBIDA estimate has been reduced marginally from $9 billion to $8.9 billion.

Current Arb Spread

The arb spread is down from 6.8 percent at the beginning of the year to 2.6 percent, which Ratcliffe believes is appropriate, given the high probability of the deal being successful and the two-month timeframe for the closure of the deal.

However, in case the deal fails, Time Warner Cable is well positioned to initiate a $3.75 billion share buyback in 3Q16 and another $3.75 billion in 4Q16, before normalizing to $2.5 billion in 2017 and thereafter, the analyst noted.