February 15, 2013 8:05 pm

Primetime arrives in saga of TV takeovers

Life is imitating art in the cable industry. Two years ago, in an episode of 30 Rock, the NBC comedy about a thinly fictionalised NBC, the characters watched as a Kabletown logo replaced the GE sign atop 30 Rockefeller Plaza. “It’s happening,” Alec Baldwin’s character said dolefully to Liz Lemon, played by Tina Fey, as he mourned NBC’s takeover by a giant cable company.

This week, naming rights to the GE building at 30 Rockefeller Plaza passed to Comcast, as the largest US cable operator paid GE $18.1bn to buy the 49 per cent of NBCUniversal it did not already own, along with NBC properties including the studios housed in the art deco tower.

Cable TV penetration rates

Cable TV penetration rates

The deal was one of a wave of mergers fuelled by obliging credit markets. Warren Buffett’s $28bn bid for Heinz, the $11bn American Airlines-US Airways merger and the $24.4bn Dell buyout have led to predictions of a new surge in dealmaking. Across sixth Avenue from NBC, the Time Life building was shaken by news of a planned spin-off of most of Time Warner’s magazines.

But cable is enjoying a particularly notable revival in animal spirits. Comcast’s deal, struck more than a year ahead of expectations, came a week after John Malone’s Liberty Global made a $23.3bn offer for Virgin Media, the UK cable operator.

Meanwhile, Vodafone is looking at Kabel Deutschland, Germany’s largest cable company, and Charter Communications is spending $1.63bn on Optimum West, a US cable system once called Bresnan that rival Cablevision acquired only two years ago for $1.4bn.

Analysts can point to company-specific reasons for each deal, such as Comcast’s fear that NBC’s improving performance would make a buyout costlier in the long run, but sector-wide factors are also playing a role.

“It’s a subset of media that benefits from scale,” one media banker says, noting the savings larger cable companies can glean when buying set-top boxes or network technology. “Couple that with the debt markets and an economic backdrop with more clarity and it’s a recipe for transactions with a bit more boldness,” he adds.

Low interest rates should allow Liberty Global to price almost $8bn of debt to help finance the Virgin Media deal at yields of less than 6 per cent. “Credit markets have never been stronger for companies like ours,” one US cable executive says.

Bundling ahead

Large telecoms groups are hoping to reverse the long-term decline in traditional voice revenues across Europe with innovative bundled packages of television, high speed internet access and home and mobile phone connectivity, writes Daniel Thomas .

The importance placed on these “quad plays” underpins Vodafone’s interest in Kabel Deutschland. That was not a great surprise to many analysts, given clear statements in the past by management that Vodafone would develop its “converged” fixed and mobile network by borrowing, building or buying lines.

If it were to buy Kabel Deutschland, Vodafone could also extract cost savings as it would own more of the fixed network that supplies its mobile masts. The emphasis by Vittorio Colao, chief executive, on convergence has increased markedly over the past year, with recent complaints that some European incumbents have refused to open up their networks to Vodafone.

It has instead built or co-invested in fibre in Portugal and Italy, while its largest acquisition for several years was the purchase of Cable & Wireless Worldwide in the UK in 2012. Vodafone has also been linked with cable operators such as Ono in Spain and Ziggo in the Netherlands.

Vodafone is still regarded by many investors as a purely mobile operator – the part of the telecoms market that has suffered the worst from the economic downturn and regulatory revenue cuts – even though it owns fixed line networks across Europe.

Vodafone made fixed line revenues of £1.3bn in the last quarter, almost a third of which was generated in Germany.

The UK-listed company could combine its 3.2m broadband and 150,000 TV customers in Germany with Kabel Deutschland’s 8.5m households should any offer succeed.

A Berenberg Bank study of 1,000 households in the UK, France and Germany found that demand for bundling services was robust.

The German bank’s survey found that “bundling begets more bundling” and that there was a correlation between increased levels of bundling and higher levels of customer satisfaction. That could result in lower potential churn rates.

Indeed, customers are also less likely to cancel triple- or quad-play contracts because of the nuisance of replacing all three or four services.

Cable companies are also finding it easier to attract capital because investors are more confident that they have a competitive advantage over satellite, telecom and online video rivals. Where cable companies once pitched their own selection of TV channels, now they market themselves increasingly on fast broadband speeds. “Superfast broadband is something most consumers really get in an intuitive way,” one US cable executive says.

The Federal Communications Commission says that the average speed US subscribers sign up for has risen about 20 per cent in the last year to 15.6 Mbps, showing consumers’ appetite for faster connections.

Analysts say that in Europe the high quality of cable assets in comparison to the digital subscriber line technology that telecoms incumbents typically use will prove a particular advantage as bandwidth-hungry services such as high definition video on demand becomes more popular.

“We’ve always been fans of cable,” says Nick Brown, analyst at Espirito Santo. “The cable assets in Europe are of a very high quality and they now have a competitive advantage over the incumbents. Really the only thing the incumbents could do in the long term to defend themselves is invest more heavily in fibre.”

In Europe, where cable evolved as a more regulated utility than in the US, average prices for cable video packages are also typically lower – about €30 per month as opposed to the $80-$100 US cable operators charge. The saving in switching to a €6-€7 monthly Lovefilm or Netflix subscription therefore looks less compelling.

Fears remain that customers are “cord-cutting” and finding their video by other means. Online video viewing is soaring, with ComScore this week estimating that each month 182m Americans consume 19.2 hours of video on sites such as YouTube, Hulu, Vevo and Yahoo.

Yet industry executives argue that cable can coexist with “over the top” alternatives such as Netflix, LoveFilm, Apple’s iTunes, Amazon Prime or Aereo. A new generation of set top boxes is offering on-demand video streaming and other providers’ apps, sometimes harnessing the very internet video services that threaten to take viewers away from traditional cable channels.

“We already have the programming relationships, unlike Netflix and Lovefilm, who begin life subscale and have to pay up to create a catalogue of compelling content,” one cable executive says.

Comcast’s takeover of NBC is a marriage of distribution and content that contrasts with Time Warner’s decision to spin off its cable business from its TV networks and film studios in 2009. Distributors’ resurgence since then has not come at content owners’ cost. Shares in Comcast have tracked content stocks such as CBS, Time Warner and Walt Disney remarkably closely over the past year.

The distributors still face real threats, from the rising cost of programming and weak housing and employment figures to the risk that their lead in broadband speeds will be threatened as the likes of Verizon and BT invest in faster “fibre to the home” technology.

But with a market capitalisation of $109bn, Comcast is now America’s largest media company, $10bn bigger than Disney. NBC’s satirists may not approve, but cable now has the tallest tower on the corporate media skyline.

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