Time Warner Cable Inc (TWC): Who Could Buy TWC -- Charter Or Comcast?

The M&A chatter over Time Warner Cable, Inc. (NYSE: TWC) has gained momentum recently as press reports have suggested Charter Communications (NASDAQ: CHTR) was lining up financing from banks to fund a bid for Time Warner Cable.

Separately, some reports suggested Comcast Corporation (NASDAQ: CMCSA) was TWC's preferred suitor while others indicated Comcast and Charter were discussing a joint bid for TWC, in which they would carve up the company, and take the markets complementary to their existing footprints. The potential takeover scenario pushed shares of TWC 37 percent higher this year.

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The Charter acquisition of TWC is most likely and, to a certain extent, the reports regarding Comcast's interest could be an effort to get a higher price.

UBS analyst John Hodulik says Charter could pay about $160 per share for TWC, roughly 8.5 times 2015 EBITDA estimate. The deal could bring $1 billion in annualized operating synergies and continue to assume the combined company could carry 5 times leverage and slightly accretive to free cash flow in 2015.

On the other hand, a Comcast-TWC deal generate substantial synergies and cannot be completely discounted. Comcast's CFO has stated that adding more video customers would not move the needle in terms of content costs. Still, the possibility of a deal cannot be sidelined.

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Time Warner is among the largest providers of video, high-speed data and voice services in the United States, connecting more than 15 million customers to entertainment, information and each other. Charter and Comcast have a subscriber base of more than 10 million and 21 million, respectively.

Together, Comcast and TWC would be by far the largest pay TV operator in the U.S., passing almost three-fourths of occupied households. While this would not decre! ase competition for residential services as these companies' footprints do not overlap, their dramatically larger subscriber base would generate additional leverage in programming discussions.

However, the massive scale of the potential deal may attract regulatory scrutiny due to the combined company's strong market share in broadband. In the case of TWC-Charter deal, it is less likely the transaction would face serious regulatory issues

Meanwhile, TWC's chances of getting acquired have heightened as vocal hedge fund investors are building their positions in the company. Regulatory filings show that hedge fund Paulson & Co. bought 1.42 percent of TWC's outstanding shares during the third quarter.

John Malone's Liberty Media (NASDAQ:LMCA), which owns 27 percent of Charter, has been pushing for a merger between Time Warner Cable and Charter. Meanwhile, there have been arguments that the rising programming costs may force consolidation among cable TV firms.

Malone has stated that the Federal Communications Commission (FCC) should allow further consolidation of the cable industry as cable operators need more negotiating power due to stiff competition from the likes of satellite operators DirecTV (DTV) and Dish Network (DISH), and carriers such as AT&T (T) and Verizon (VZ).

Whoever snaps up TWC (Charter or Comcast), the cable TV industry seems set for a consolidation.