Friday, February 7, 2014

Charter and Time Warner Cable (TWC) - How Can David Buy Goliath?

Charter – How Can David Buy Goliath?

(Note: I am not an analyst so this post should probably be ignored)

Two words: Tax assets. What does this mean to Charter? To find out, let’s begin by diving into their 2013 10-k.

In the Income Tax notes in Charter’s 2013 10-k, we find that Charter has “…$7.7 billion of federal tax net operating loss carryforwards, capital loss carryforwards and suspended losses resulting in a gross deferred tax asset of approximately $2.7 billion.”

This means Charter's $7.7 billion of debt has resulted in almost $3 billion in deferred tax assets. Over a period of several years, according to FASB (Finanical Accounting Standards Board) rules, Charter can use these tax assets to offset income.

This is very simiiliar to the mortgage interest deduction that allows homeowners to reduce their taxable income by the amount of their mortgage interest. The interesting point in this case is that Charter doesn't have to actually spend the money to get the tax break: They have already accumulated the tax asset and now get to use it to defer accounting income.

So, unlike the mortgage interest deduction, these funds are not flowing out of Charter. They are still available to Charter for things like reinvestment in PP&E, such as cable companies or Sirius, or pay down debt.

So Charter can show a loss on their Income Statement, which means they pay no additional income tax, and then use the resulting cash savings for other things.

In the next post, I'll do some analysis of Charter before the merger and more importantly what the NewCo will look like if Charter is successful in their bid for TWC.

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