Earlier this month a merger sent a seismic shift through the US cable sector, and it wasn’t the deal Charter Communications was hoping for.
After discussions between Charter, industry giant Comcast, and Time Warner Cable (TWC), Charter was left at the…
Earlier this month a merger sent a seismic shift through the US cable sector, and it wasn’t the deal Charter Communications was hoping for.
After discussions between Charter, industry giant Comcast, and Time Warner Cable (TWC), Charter was left at the altar, while Comcast and TWC agreed a US$45.2bn merger.
Charter had been pursuing TWC since June last year and was considering a hostile takeover of the business. It was also speaking to Comcast about the possibility of a joint bid. Controlling shareholder and cable veteran John Malone had previously said that cablecos in the US needed to merge and Charter was going to be part of that.
But then Comcast muscled in with an offer 20% higher than Charter’s proposition which received the blessing of TWC’s board – a proposal which looks nearly impossible for Charter to beat.
Charter now has to cast its eye over the other midsize players in the market if it still wants to gain scale, but it is questionable how much value can be added, analysts told TelecomFinance.
“We feel like there’s not that much sizeable that is reasonable for them to buy,” explains Karen Berckmann, a senior analyst at Moody’s.
Her colleague Neil Begley agreed: “Every player after Time Warner Cable has either a shareholder with absolute control or is private, or, as in the case of Charter, has a shareholder with effective control, which means you won’t have any hostile takeovers going on.”
Begley suggested that we may see instead cablecos struggling to agree on price and that even if consolidation did happen – which he thinks is unlikely – then the companies still would not gain that much scale.
“If you look at the scale of these mergers and put them all together, say Cox Communications, Charter, Cablevision and Bright House Networks, you will probably still only have 15 million subscribers or so. It’s unlikely that all those companies would be merged together but even if they were, that company would still be half the size of Comcast/Time Warner Cable.”
New Street Research analyst Jonathan Chaplin added: “They don’t have the appeal of TWC because there isn’t a turn-around story at any of the other assets; they are all pretty well run.”
Berckmann said that Mediacom was an unlikely target as it was only taken private in 2011. Similarly, Cequel Communications, which operates as Suddenlink, was only acquired by its private equity and pension fund owners in 2012. Meanwhile Cox and Bright House have conservative owners and may prove reluctant sellers. The Dolan family, which controls Cablevision, is unlikely to choose to sell now as the operator has been performing poorly and therefore would be unlikely to be able to obtain a favourable valuation.
“You might have to look further ahead,” Berckmann suggested.
Their comments echoed those of Charter’s CEO Tiom Rutledge. Speaking on the operator’s Q4 conference call, he said: “If Time Warner is not available, think about the whole landscape out there. It’s very hard to put together a scale that would really meaningfully change it.” Rutledge said the best chance to grow was organically, increasing the penetration beyond the seven million homes their network passes.
As part of the Comcast/TWC merger, the companies will be divesting three million subscribers.
Chaplin said: “Charter may have an advantage because there are other ways for Comcast and Charter to work together to create value. And Comcast did kind of steal the asset from them…”
He added that other cable companies would likely be interested in the subscribers, and private equity firms may also look to acquire systems.
But will any of this dissuade Charter’s controlling shareholder John Malone from pursuing growth in the US?
“I don’t see why Malone should lose interest in US Cable,” Chaplin said. “Losing TWC was certainly a setback, but he has a good asset and he is a deal maker.”
“There are still other deals to do. I still think you could see Charter pick up three million subscribers, engage in system swaps with Comcast, and get access to … Comcast platforms following this deal.”
