Charter Seen Eyeing Cox After Time Warner Loss: Real M&A
Charter Communications Inc. (CHTR) may not lick its wounds for long before trying to grab another piece of the consolidating U.S. cable industry.
Comcast (CMCSA) Corp. Chief Executive Officer Brian Roberts swooped in last week to buy Time Warner Cable Inc. for $45 billion, nabbing the second-largest U.S. cable provider out from under Charter CEO Tom Rutledge’s nose. Charter, John Malone’s Liberty Media Corp. and advisers are having a board meeting next week to discuss options, according to a person familiar with the matter.
While Charter is unlikely to match Comcast’s bid, it will probably buy some of the 3 million subscribers Comcast plans to divest and then set its sights on another target, said Paul Sweeney of Bloomberg Industries. Closely held Cox Communications Inc., the industry’s No. 3 provider with about 4.4 million subscribers, may be an attractive consolation prize to bolster Charter’s subscriber ranks, said CRT Capital Group LLC. Bright House Networks LLC and Suddenlink Communications also could help Charter expand, said Raymond James Financial Inc.
Charter and billionaire Malone “have already made it clear that scale is important in this industry,” Lance Vitanza, a Stamford, Connecticut-based managing director and analyst at brokerage CRT Capital, said in a phone interview. “At this point the most likely strategy is to accept defeat and move on to other acquisitions.”
Alex Dudley, a spokesman for Charter, declined to comment on the company’s plans. A representative for Cox said the company isn’t for sale.
Time Warner Cable last week agreed to sell itself to Philadelphia-based Comcast in a stock deal valued at $158.82 a share when it was announced. The offer was 20 percent higher than Charter’s rejected bid of $132.50.
Charter is unlikely to be able to acquire the New York-based cable operator now, said Tuna Amobi, a New York-based equity analyst at S&P Capital IQ. Two days before the surprise agreement with Comcast, Charter had nominated a full slate of directors to Time Warner Cable (TWC)’s board.
“It’s hard to imagine that they’re going to be pushing ahead with the proxy battle,” Amobi said. “The case for the superiority of Comcast’s offer was well made.”
Charter is unlikely to match Comcast’s bid and is willing to study any assets Comcast would sell, according to a person familiar with the matter, who asked not to be identified because the negotiations were private. Buying Time Warner Cable will add more than 11 million residential subscribers to Comcast’s 21 million video customers, compared with 4.3 million for Charter.
The 3 million subscribers that Comcast may divest could be worth about $17.6 billion, based on the value that the Time Warner Cable bid placed on each subscriber, according to an analysis from Sweeney, director of North American research at Bloomberg Industries, and Geetha Ranganathan, a media analyst with Bloomberg Industries. Matthew Harrigan, an analyst at Wunderlich Securities Inc., estimates they could be valued at $13 billion to $16 billion.
Picking up divested subscribers won’t be the end of Charter’s dealmaking, according to Sweeney. Malone, who owns a stake in Charter through Liberty Media, has said mergers will help the cable industry cope with the lower video profit margins caused by higher programming costs and fewer new customers.
“John Malone’s stated intention is to participate in consolidation of the cable television industry,” Sweeney said in a phone interview. “He’s going to have to do a number of smaller deals to get to where he needs to be.”
Cox held talks last year about combining with Charter, people familiar with the discussions said in August.
Cox, which is owned by family-controlled Cox Enterprises Inc., would be an appealing takeover target for Charter because it has strong assets and is the next biggest target available after Time Warner Cable, said Sweeney and Vitanza of CRT Capital. Cox primarily provides cable services in the Southeast, Midwest and California.
“It’s basically the only really big bite you could take,” Vitanza said. “It’s the only one that would really allow them to add meaningfully to their position.”
A purchase of Cox won’t be possible unless the family wants to sell, according to Leo Hindery, managing partner of private-equity fund InterMedia Partners LP.
“The Cox assets are superior assets,” Hindery said today in an interview with Bloomberg Television. “They’re geographically well-situated, brilliantly run. They will go into Charter only if the Cox family decides that’s good for the Cox family.”
Cablevision Systems Corp., (CVC) the $4.4 billion cable operator controlled by the Dolan family, is another acquisition candidate, said Vitanza.
Charter CEO Rutledge was chief operating officer at Cablevision until December 2011 and “knows those assets better than anyone else,” Vitanza said. Charter could afford to pay $25 a share for the company, 51 percent more than its closing price last week, he said.
Cablevision fell 0.8 percent to $16.46, while Charter rose 1.7 percent to $131.50.
Malone, 72, said in October that he doesn’t see Cablevision as an appealing target because it’s entrenched in the New York market, giving it less room to grow.
Bright House Networks or Cequel Communications Holdings, which operates as Suddenlink, could also draw interest from Charter, said Frank Louthan, an Atlanta-based analyst at Raymond James. Bright House has about 1.9 million subscribers, while Suddenlink has 1.2 million, according to data compiled by Bloomberg.
Mediacom Communications Corp., with about 960,000 subscribers predominantly in smaller cities and towns, is another possibility, said Amobi of S&P.
A representative for Bethpage, New York-based Cablevision declined to comment. Bright House, Suddenlink and Mediacom, which are all closely held, didn’t respond to requests for comment.
Charter’s remaining options pale in comparison to Time Warner Cable, which it had been courting for months. The Cox family may not want to do a deal with Charter because it would add leverage, while Cablevision’s New York assets may not be a good fit for Charter, said Harrigan of Wunderlich.
The other smaller operators don’t have enough subscribers to help Charter approach the size of Time Warner Cable and Comcast, he said.
“Charter is in a situation where they can pick up some nice systems and it’s better than Time Warner Cable remaining intact, but it’s a far cry from becoming the sister to Comcast in terms of the domestic business,” Harrigan said in a phone interview.
Comcast’s bid for Time Warner Cable still validates the need for consolidation in the cable industry, and Charter is one of the best positioned buyers, said Sweeney of Bloomberg Industries. After the shares more than doubled in two years, Charter had a market value of $13.5 billion last week.
“A lot of cable companies are now probably stepping back and saying, ‘Maybe it is time to sell,’” he said. For Charter, “it just remains to be seen whether they can convince anybody to sell to them.”
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