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Time Warner Cable And Charter Communications Merger: What You Need To Know

Summary

Now that the FCC has voted in favor of the Time Warner Cable (TWC) and Charter Communications (CHTR) merger, nothing stands in the way of the new company.

The correlation between TWC and CHTR is 95% but TWC has a 1% spread on CHTR.

The new company, New Charter, will have no competitors.

(Source: South Park via killthehydra.com)

Now that the FCC has voted in favor of the Time Warner Cable (NYSE:TWC) and Charter Communications (NASDAQ:CHTR) merger, nothing stands in the way of the new company, hereafter referred to as "New Charter." Under the agreements of the deal, TWC will gain $78.7 billion in a cash and CHTR stock. What does this mean for TWC shareholders?

TWC shareholders will earn $115.00 of cash and New Charter shares for each TWC share held. The New Charter shares will equal 0.4562 shares of CHTR. Unfortunately for arbitrage traders, the arbitrage spread is now a mere 1%.

With this deal going through, TWC should be trading at around $215. Still, buying TWC now gives you a quick and easy $3 profit, provided that CHTR does not fall too much. But the real question is whether now is the time to buy TWC; after all, few investors will be picking up TWC just for the 1% gain.

Instead, investors buying TWC are likely to see the 1% gain as an extra incentive for investing in New Charter as an early adaptor. As New Charter stock will act much like TWC or CHTR, we should take a look at these two stocks to get a good idea as to where New Charter stock is headed.

TWC or CHTR?

Is the 1% arbitrage opportunity worth it? Should we just buy CHTR if we want exposure to New Charter? In other words, are TWC and CHTR different?

To answer this, we should go straight to the correlation between the two stocks. If they are correlated, it will make little sense to buy CHTR when TWC is objectively underpriced. I ran a correlation analysis over the past year to find that the correlation between TWC and CHTR is 95%.

Thus, buying CHTR instead of TWC will cost you 1% of your investment in opportunity cost.

Seasonality

Is now the time to buy? Looking over the history of these two stocks, we find that they are consistently strong, with little regard to season:

The rough spots seem to be the August to October...


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