For years, cable operators have been at the heart of how television is financed, distributed and viewed in the US. But with new competitors rising and rapid technology changes upending the business, the industry is entering a period of upheaval and possible consolidation.
Charter Communications, which is 27 per cent owned by John Malone’s Liberty Media, is preparing to make the first move as it readies a formal offer to buy Time Warner Cable, in a deal that would value Time Warner’s equity at more than $36bn.
The results of this shake-up will have an impact not just on the estimated 56.4m US households that pay roughly $145 a month to cable operators, according to SNL Financial, but also ripple through to programmers and distributors across the world.
The rationale for consolidation is clear. Geographically divided, no one cable operator has national dominance (see chart on left).
This has kept cable operators from competing with one another in the past but they are now fending off new rivals. One issue is cord cutting, where people cancel pay-television subscriptions and turn to cheaper online streaming alternatives such as Netflix and Hulu that can appear – just like traditional programming – on internet-connected televisions.
Even those who are not cutting the cord are choosing TV services provided by satellite or telecoms operators instead.
With new rivals entering the fray sending the demand for television content soaring, there has been a sharp increase in the costs television distributors pay programmers. Negotiations between distributors and programmers are growing increasingly hostile, leading to more than 80 broadcaster blackouts in the past two years.
So far, cable operators have met the challenges by charging higher rates and diversifying into broadband, phone and business services. Yet for the industry to compete in the future, some executives argue that consolidation is the solution.Back to top
The Cable Cowboy – John Malone
None of this is new to Mr Malone, the 72-year-old chairman of Liberty Media, known as the “cable cowboy”. In the 1980s and 1990s, he led a wave of cable consolidation by lassoing together a series of smaller US cable operators to build TCI, the country’s largest cable company that he sold to AT&T in 1998 in a $48bn deal.
Now he is at it again.
In May, Liberty Media spent $2.6bn for 27 per cent of Charter Communications, the fourth largest cable operator in the US by subscribers. Mr Malone’s grander strategy soon became clear. Within weeks, Greg Maffei, Liberty Media’s chief executive, approached Glenn Britt, the outgoing chief executive of Time Warner Cable, to discuss the possibility of a deal with Charter.
The approach was rebuffed but Mr Malone and Charter have continued to circle their target, publicly advocating for the benefits a new wave of consolidation would bring. Charter now is ratcheting up the pressure, planning to send a so-called bear hug letter to its larger rival Time Warner Cable as early as Monday. The offer represents a price between $130 and $135 a share or an equity value of more than $36bn.
“When I joined the cable industry way long ago what occurred to me was it was an enormously balkanised business. It was sub-scale and had no ubiquity,” Mr Malone said, adding that consolidation would allow the geographically fragmented companies to pool resources, invest in new technologies and build national markets.
“The history of the business is replete with the industry solving its balkanisation and scale problem through joint effort . . . I think that can be done again.”
Charter, which has about 5m residential and business customers in a smattering of markets from California to New England and Tennessee to Oregon, also discussed a $25bn debt financing package to help it acquire its larger rival. Charter would need substantial funding to snap up Time Warner Cable.
Some analysts caution that while the broader logic for consolidation is clear, a combined Charter-Time Warner Cable would be highly leveraged and leave little margin for error in integrating the two companies. Others caution that Charter should be careful given its 2009 bankruptcy, blamed on heavy debt and under investment.Back to top
The Target – Time Warner Cable
It is no accident that Time Warner Cable finds itself at the centre of the cable consolidation bull’s eye.
The second largest cable operator in the US by subscribers, the company is considered the industry’s crown jewel with its 15m customers across the highly sought-after markets of New York and Los Angeles, among other regions.
Yet Time Warner Cable’s operations have faltered. In the most recent quarter, Time Warner Cable missed expectations, losing video, high-speed data and voice subscribers. The weak performance, analysts say, could spur a deal.
Ironically, its takeover candidate status has sparked shares in Time Warner Cable to soar nearly 40 per cent in the past six months. With shares now trading at about $130, some question whether potential buyers will be willing to pay an additional premium for a company with deteriorating performance– a concern borne out by Charter’s offer of between $130 and $135 a share.
Time Warner Cable’s longtime chief executive Mr Britt, who dismissed Charter’s earlier advances, retires from his post at the end of the year after 12 years on the job. Stepping into the position is Rob Marcus, Time Warner Cable’s chief operating officer who started his career as a mergers and acquisitions lawyer. His contract stipulates that he could be paid more than $50m if the company is acquired and his position is terminated.
One banker close to the situation said Time Warner Cable had switched from trying to resist a takeover to pushing to get the highest price for a deal. “There is a realisation that it will get done, the business will be sold, it is just a question of to whom and at what price.”
During an investor conference last week, Mr Marcus said that the company’s management team is focused on running Time Warner Cable for the long haul and that any deal activity is driven by shareholders’ best interest.
“My job is to maximise value for shareholders,” he said.Back to top
The 800 Pound Gorilla – Comcast
Enter Comcast, the industry heavyweight with 52m customers, ownership of entertainment group NBCUniversal and a $172bn enterprise value.
Comcast entered the cable consolidation fray after Time Warner Cable reportedly invited the company to consider a deal. Comcast has considered both a solo “white knight” bid for Time Warner Cable or a joint bid with Charter. Charter’s current proposal does not include Comcast, according to people familiar with the process.
A Comcast-Time Warner Cable merger would create an industry behemoth, controlling a third of the US video subscriber market and a 35.9 per cent share of the US broadband subscriber market, according to MoffettNathanson estimates.
While shareholders are likely to support such a deal because it would provide an outlet for its cash, bankers and analysts are sceptical that Comcast could launch a successful bid given the size of the market it would control and the potential for significant regulatory hurdles. Comcast already is under scrutiny following its deal for NBCUniversal that valued the entertainment company at about $30bn and bundles the country’s largest television distributor with one of the country’s largest programmers.
That sentiment is bolstered by recent comments from the US Federal Communications Commission that such a deal would probably face regulatory objections.
A lawyer, who is not involved in the deal but wished to remain anonymous, said that the response from the FCC would have damped Comcast’s ambition. “They would have seen that and thought the uphill struggle involved was probably not worth the energy required,” the lawyer said.
A joint bid with Charter, meanwhile, could dodge regulatory concerns and give both acquirers a boost in scale by dividing Time Warner Cable’s assets. Amy Young of Macquarie Research points out that both Charter and Comcast own networks adjoining Time Warner Cable’s.Back to top
The Missing Links? – Cox and Cablevision
Waiting in the wings are outliers Cox and Cablevision.
Cox is the third-largest US cable company with an estimated 6m residential and business customers primarily in the south. The Atlanta-based, privately owned company long has been rumoured to be an acquisition target, but the company insists that it is not for sale and rather is seeking growth.
Cox, too, has reportedly considered a bid for Time Warner Cable.
Meanwhile Cablevision has largely stayed out of the spotlight. But its strength in the New York metro area, where it has 1.8m customers, will probably make it a hot commodity should other deals go through and industry consolidation begins in earnest. Comcast, Time Warner Cable and Charter all operate in regions adjacent to Cablevision’s network.
Geography matters, because it is cheaper and easier to manage a large contiguous network than having outposts in many cities. New technology advancements also can get a boost. Cable operators, for instance, have been launching hundreds of thousands of new WiFi hotspots. A combined entity could invest more in the initiative as well as give it a more robust promotional push.
“If pay TV households get reshuffled and swaps enter into the equation, Cablevision could get broken apart and sold to Comcast, Time Warner Cable and Charter,” Macquarie’s Ms Young said. She calls Cablevision the “missing geographic link”.Back to top
The Hit Makers – Television Networks
The consolidation fervour in the cable business has spread to the television networks that produce programmes and hit shows. Discovery Communications, the owner of the Discovery Channel and Animal Planet, has considered a bid for Scripps Networks, home of the Food Network and the Travel Channel.
While the consideration is driven largely by ambitions to grow internationally, such a deal also could give programmers more heft in fee and rights negotiations. Discovery and Scripps declined to comment.
As cable operators fight back against rising programming costs through consolidation, television networks too are seeking the benefits of scale. Once again, Mr Malone could be stirring up the pot – he is a director on Discovery’s board.
Some analysts caution that TV groups such as Discovery and Scripps already exert substantial pricing power and that further consolidation is not likely to help much more.
Despite underlying business tensions, television programmers and distributors historically worked together to promote overall growth of the business. Technological changes, however, are forcing those tensions to erupt into frequent, public battles.
This summer, for instance, a contract dispute between Time Warner Cable and the broadcaster CBS led the network to become unavailable for millions of customers in New York, Los Angeles and Dallas for about a month.
This wave of consolidation is not limited to US borders. Just last week, Mr Malone’s Liberty Global group was revealed to be in talks with Dutch operator Ziggo. The move came after Liberty paid $23.3bn last year to acquire Britain’s Virgin Media.Back to top
Additional reporting by Ed Hammond
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