Malone Seen Stalking Time Warner Cable Merger: Real M&AAlex Sherman
Liberty Media Corp.’s investment in Charter Communications Inc. may be billionaire John Malone’s first move in a multi-year chess game to consolidate the U.S. cable industry.
Higher programming costs and fewer new customers have crimped video profit margins, making mergers appealing, Liberty Media Chairman Malone said at his annual shareholder meeting last week. More than 100 million U.S. households already subscribe to pay-TV, and major cable providers have lost TV customers for at least five years, according to data compiled by Bloomberg. Malone said Charter -- the fourth-largest U.S. cable operator, in which Liberty Media bought a 27 percent stake -- can be “a horizontal acquisition machine.”
Charter’s 49 percent stock gain this year has outpaced all peers, giving it a stronger currency for deals. While media industry forecaster SQAD Inc. said the $11.5 billion company may target smaller operators such as closely-held Mediacom Communications Corp. or Cable One Inc., Malone’s ultimate goal may be to challenge Comcast Corp. for U.S. cable supremacy, said Craig Moffett, an analyst at Moffett Research LLC. That would require buying Time Warner Cable Inc., the second-biggest U.S. cable provider, he said.
“If you’re John Malone, you’re thinking: we’ve got to get bigger,” Jim Boyle, managing director of SQAD and formerly a cable equity analyst for more than 19 years, said in a telephone interview. “The bigger Charter can get, the more economies of scale discounts it can get,” he said. “If everyone else is playing checkers, Malone is playing three-dimensional chess.”
Today, Time Warner Cable shares rose 0.9 percent to $95.74, the biggest gain among media stocks in the Standard & Poor’s 500 Index. Shares of Charter fell 1.2 percent to $112.53.
With the National Cable & Telecommunications Association’s annual cable show kicking off today in Washington, Malone’s re-entry into the U.S. industry will be the most talked about new development, Chris Marangi, a money manager at Gamco Investors Inc., said in a phone interview. Rye, New York-based Gamco manages about $40 billion.
“The big news at the cable show this year is that the king is back,” Marangi said. Liberty Media, based in Englewood, Colorado, paid $2.6 billion for its stake in Charter last month.
The hype stems from Malone’s history of rolling up cable companies. He built Tele-Communications Inc. in the 1970s and 1980s into one of the biggest pay-TV companies before selling it in 1999.
In Europe, Malone’s Liberty Global Inc. purchased Virgin Media Inc. for about $24 billion to expand in the U.K. Liberty Global also has acquired a stake in Dutch cable operator Ziggo NV and is considering a takeover bid for Kabel Deutschland Holding AG, Germany’s largest cable provider, two people familiar with the matter said in April. Liberty Global already controls Germany’s second-largest cable company.
The 72-year-old said recently that he intends to pursue both small and large acquisitions as an investor with “strong influence” at Stamford, Connecticut-based Charter.
“You do the smaller roll-up stuff to continue the momentum and the return on capital, and you look for opportunities to do something bigger,” Malone said at last week’s Liberty Media investor meeting.
Alex Dudley, a Charter spokesman, and Justin Venech, a spokesman for Time Warner Cable, declined to comment on deal speculation. Liberty Media spokeswoman Courtnee Ulrich didn’t respond to an e-mail or phone call seeking comment.
Charter, which serves about 4 million video customers across 25 states, is dwarfed by Comcast’s 22 million TV subscribers and Time Warner Cable’s 12 million. Among residences, Charter added 99,000 Internet and 59,000 telephone subscribers in the first quarter, while losing 24,000 TV customers. Combining with New York-based Time Warner Cable would boost its video customers to about 16 million and total subscriber base to almost 20 million.
“If you’re going to do a transformational deal, your choices are Time Warner Cable, Time Warner Cable and Time Warner Cable,” Moffett, who is based in New York, said in a phone interview. “You can roll up all the little guys if you want to, but even if you did, you haven’t built something that’s truly large scale.”
Charter’s stock has risen 79 percent in the last year, the biggest gain in the Bloomberg Industries Cable & Satellite Media Index. The cable operator may post net income of $21 million this year, according to analysts’ estimates compiled by Bloomberg, its first annual profit since emerging from bankruptcy in 2009.
Charter carries $12.8 billion of debt, more than its market value. That may make it difficult to raise enough debt to acquire the larger Time Warner Cable, which has a market value of $27.6 billion, Marangi said. Malone may need to use debt from Charter and pair it with debt from Liberty Media to make a large enough bid, he said. Liberty Media has $2.4 billion of debt and a market capitalization of $15.4 billion.
“Time Warner Cable is gone,” Marangi said. “I think Charter will buy them eventually, whether it’s Liberty facilitating that or Charter doing it directly or the two companies doing it in partnership.”
Malone’s plans to use Charter as a vehicle to acquire Time Warner Cable may be delayed until he gains de facto control of the company, Moffett said. Liberty Media agreed not to increase its beneficial ownership in Charter above 35 percent until January 2016 and 39.99 percent thereafter.
Liberty Media also holds a stake in Time Warner Cable, the size of which it doesn’t disclose, according to the annual report of Malone’s company.
About 86 percent of U.S. TV households already pay for their video services, according to data compiled by Bloomberg. That has limited growth to new household formation, “which has been pretty weak during the last five years,” Time Warner Cable CEO Glenn Britt said at a conference last week.
Time Warner Cable has lost video customers for 16 consecutive quarters as customers defect for competitive services from Verizon Communications Inc.’s FiOS, AT&T Inc.’s U-verse and satellite TV. Charter has added TV customers in just one quarter since emerging from bankruptcy.
Programming costs are rising more than 10 percent a year, about twice as much as pay-TV companies have increased customers’ bills. Larger cable companies are able to bargain for smaller price increases by threatening to drop programming for all of their customers, which would hurt channels’ advertising and affiliate-fee revenue.
Shrinking profit margins for video services and consistently growing demand for broadband means the time is right to pursue acquisitions again, Malone said.
“The whole name of the game in the cable business is scale,” he said. “It seems there’s an opportunity there.”
Charter may first opt to bulk up with smaller purchases before it takes a run at Time Warner Cable, said Boyle of Tarrytown, New York-based SQAD. The company could target Middletown, New York-based Mediacom, which is the eighth-largest U.S. cable company with about 1 million video subscribers, he said. Washington Post Co.’s Cable One, the 10th-largest provider with about 720,000 customers, may also be a takeover candidate for Charter, Boyle said.
“What we’re talking about is an industry that is becoming more capital intensive,” Todd Mitchell, an analyst at Brean Capital LLC in New York, said in a phone interview. “What happens to mature, capital-intensive companies -- they consolidate. So, yes, I think the cable industry is ripe for consolidation.”
Tom Larsen, a Mediacom spokesman, and Rima Calderon, a spokeswoman for Washington Post Co., declined to comment.
Cablevision Systems Corp. may also be an eventual target for Charter, said Marangi, whose firm owns about 9 percent of Cablevision’s Class A shares. Charter’s potential to acquire Time Warner Cable, another possible bidder for Cablevision, may convince the controlling Dolan family to sell while there are still multiple interested buyers, he said.
Kelly McAndrew, a spokeswoman for Cablevision, said the company doesn’t comment on speculation.
Cablevision is the fifth-largest U.S. cable company and has a market value of $3.88 billion. Still, Moffett said Cablevision won’t enable Charter to compete with Comcast and DirecTV for pay-TV domination as much as a deal with Time Warner Cable would, and that may be Malone’s end goal.
“John Malone is an M&A addict,” Boyle said. “Dr. Malone in cable has traditionally been Warren Buffett. He doesn’t do small deals anymore. He gets out the elephant gun. In some cases, they’re really big elephants.”