Media and Wall Street executives have high hopes for the initial public offering Time Warner Cable filed last week—a $5.5 billion test of the market’s appetite for cable stocks.
If Time Warner Cable trades well, it could boost shares of not only Time Warner but of other publicly traded operators, including Comcast and Mediacom. Despite the current six-month-long rally in cable shares, cable executives are frustrated that their stocks still trade lower than they did three years ago, even though their cash flow per subscriber has nearly doubled.
That’s why Insight and Cox have gone private and Cablevision Systems is heading that way. A successful IPO could prompt investors to reevaluate Time Warner, which will own 84% of Time Warner Cable. Sanford Bernstein analysts Michael Nathanson and Drew Borst took a look at Time Warner Cable’s 1,134-page IPO filing and promptly raised their target price for the parent company from $21 to $22. Time Warner has been hovering around $17 for months.
The IPO’s effect on the parent company’s stock “is a big debate,” Nathanson says. “It provides pressure on the company to perhaps spring up.”
If the shares came to the market all at once, the deal would be one of the five largest U.S. IPOs in history. (The largest ever was the $10.6 billion raised by AT&T Wireless in 2000, according to Renaissance Capital.)
The last time a U.S. cable operator went public was 1999, when Insight Communications executives took advantage of the tech boom and sold shares at $24.50 each, then watched the price zoom to $32 the first day. However, in a comment on investors’ generally sour attitude toward cable stocks since then, Insight’s stock sank to less than $10 last year, and frustrated Insight executives took the company private.
This IPO is a bit unconventional because TWC is not a startup scrounging for money and, indeed, will not receive any of the proceeds. The offering is a step in the liquidation of Adelphia Communications. In July, TWC and partner Comcast paid $17.2 billion in cash and stock for the bulk of Adelphia’s systems, including 169 million TWC shares that the company says in its filing are worth $5.5 billion.
The stock will—at first—go to creditors who are last in line to recover from Adelphia, mainly funds that bought Adelphia junk bonds at big discounts well after the company collapsed in a massive fraud scheme by the founding Rigas family.
While Adelphia’s banks are largely recovering every cent they’re owed, investors at the low end of the capital structure are getting just 33¢-50¢ on the dollar, and much of that is in Time Warner Cable stock.