Time Warner Cable, recently announced a debt offering of $1.9 billion. [] This additional amount is expected to be used for general corporate purposes, which may include the repayment of debt and repurchase of the company’s stock. Time Warner Cable has more than $20 billion of net debt (total debt minus cash) outstanding, which compares to our roughly $20 billion estimated intrinsic value for the company and an implied $55.46 price estimate.
Time Warner Cable primarily competes with Comcast , AT&T and Verizon in both the pay-TV and broadband businesses. The company also competes with satellite pay-TV providers like Dish Network and DirecTV.
The recent debt offering means that Time Warner Cable is much more sensitive to changes in business conditions compared to some of its competitors given its higher leverage. Thus, it becomes even more critical for the company to maintain its competitiveness, as higher leverage heightens the company’s sensitivity to key value drivers like market share. We have a $55.46 Trefis price estimate for Time Warner Cable’s stock here.
Impact of Leverage on Company Valuation
To examine the impact of higher leverage, we can look at how Time Warner Cable’s value changes with respect to change in its pay-TV market share. Currently we forecast stable market share going forward despite the declines that the company has seen in the past.
With its current debt levels, an annual 1% increase in pay-TV market share (including 2010) over the course of the Trefis forecast period leads to a 48% increase in the company’s value. However, if we change the net debt amount to zero and perform a similar experiment, the overall company value would increase by only 24%. The company’s value demonstrates similar downside sensitivity to changes in market share – and heightened risk.
The upside and downside risk of Time Warner Cable’s stock is high given its large debt levels. Thus it becomes absolutely necessary for the company to remain competitive and maintain both share and pricing, although Time Warner Cable is not alone in this position as other highly leveraged companies like Sprint face similar issues.
You can see the complete $55.46 Trefis price estimate for Time Warner Cable’s stock here
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