After more than a year of anticipation, the long-awaited consolidation frenzy expected to envelop the cable market may have to wait yet again.
With Comcast’s decision to abandon its $67 billion purchase of Time Warner Cable, all eyes are now focused on Charter Communications, the Stamford, Conn.-based cable operator that started this whole thing nearly two years ago when it initiated a full-bore pursuit of the second largest cable operator in the country.
Most analysts expect Charter to make another run at TWC — company CEO Tom Rutledge has said that he would pursue Time Warner Cable in the event the Comcast deal was not approved — but when and for how much is largely undetermined.
Instead of such a merger accelerating more deal volume, it could have the opposite effect in the industry. Other smaller operators that have been waiting on the sidelines for the Comcast-TWC deal to clear now may have to wait even longer, as Charter mulls its offer for TWC.
In a research note, Needham & Co. analyst Laura Martin said she expected Charter to make a bid for TWC within the next three months. Late Friday, sources confirmed reports that Charter had already started early stage talks with TWC.
Telsey Advisory Group media analyst Tom Eagan said he believes there will still be deals, but that they will be smaller than previously anticipated.
TWC EYEING BRIGHT HOUSE?
The first one he expects to see daylight is a Time Warner Cable purchase of Bright House Networks. Bright House had agreed to be bought by Charter for $10.4 billion last month, but only on the condition that the Comcast-TWC deal was consummated. TWC already has a relationship with Bright House — TWC has the right of first offer to any bid for Bright House, which also has access to TWC’s programming discounts — and buying it could be a defensive move against a potential Charter bid.
“That’s why they have to move quickly,” Eagan said of a possible Bright House deal.
Time Warner Cable says it’s ready to take on the challenge as an independent company, and is leaving the deal speculation to others. In an interview, chairman and CEO Rob Marcus said New York-based Time Warner Cable was not blindsided by the decision to cancel the merger.
“From the day we announced the merger, we continued to execute our operating plan, initially with the intent to deliver a great company to Comcast, but also for the possibility it wouldn’t go through the regulatory process,” Marcus said. “Because we planned accordingly, we come out of this thing very well-positioned for the future.”
The decision to scuttle the deal came down quickly. Reports first surfaced on April 17 that the Department of Justice was leaning toward opposing the merger and, a week later, the termination was announced. At the same time, the Federal Communications Commission was ready to move the merger before an administrative law judge, a signal that it did not believe the deal was in the public interest.
TOO BIG IN BROADBAND
With roughly 60% of the broadband market (speeds of 25 Mbps or higher), a combined Comcast-TWC would just be too big. “We thought we could get the deal approved, we thought we could make a good case,” Comcast chairman and CEO Brian Roberts said in an interview with CNBC. “I think our team did. But in the end, we have to move on.”
But unlike past megadeals that were squashed because of video subscriber dominance, broadband and online video influence is the new lay of the land.
“Today, an online video market is emerging that offers new business models and greater consumer choice,” FCC chairman Tom Wheeler said in a statement. “The proposed merger would have posed an unacceptable risk to competition and innovation, including to the ability of online video providers to reach and serve consumers.”
Whether the FCC’s current stance will have any bearing on future Comcast deals — is the company too big to do anything? — remains to be seen, but Eagan believes Comcast could turn its sites to wireless assets or beef up its programming holdings by acquiring content production companies.
“I think the issue here was broadband,” Eagan said. Meanwhile, at Charter, Rutledge said that in the wake of the termination, the MSO’s business prospects to create new customers remain unchanged. “We will continue to drive growth through innovation in our current footprint and we will continue to evaluate investment opportunities that arise through scale,” Rutledge said in a statement.
And Time Warner Cable is prepared to move forward on its own. It unveiled its three-year turnaround plan in January 2014 — with targets of adding 500,000 broadband customers in 18 months and doubling business services revenue to $5 billion by 2018 — and it has already shown some strong results. Fourth-quarter revenue was up 3.8%, cash flow grew 5.6%, and the operator lost about 38,000 basic video customers for its best fourth-quarter subscriber showing in seven years.
“We are, without a doubt, stronger than we’ve been in many years,” Marcus said. “The business services operation has been hot for many years, it really has been a huge driver of growth for us — I continue to be confident in our ability to hit that $5 billion annual revenue bogey that we’ve talked about. Most significantly, we’ve seen a marked improvement in the health of our residential business. 2013 was admittedly a tough year for us, but during that year we were investing in foundational elements of the business that we knew would put us in good stead down the road. In 2014, those seeds started to bear fruit.”
Marcus added that with first-quarter results scheduled to be released on April 30, he couldn’t be too specific on, but, “Suffice it to say we’ve got good operating momentum,” Marcus said. “We are much stronger than we were as we sat here a year ago.”
Eagan agreed.
“The fundamentals have been dramatically better than they were a year and a half ago,” Eagan said. “And they kept the capex spending. Everyone thought, ‘Why spend the money?’ But he was right to spend the money. Now their plant is better positioned than it was before.”
Eagan said he believes Marcus wants the opportunity to prove he can take Time Warner Cable to the next level. “It was a rough start when he became CEO after Glenn,” Eagan said, referring to TWC’s late chairman and CEO Glenn Britt. “I think he wants to prove himself, and he’s had a year to reflect on that.”
Marcus didn’t rule out Time Warner Cable being involved in M&A, but stressed that the company remains focused on the business at hand.
“We’ve talked a lot about the potential value of scale, but those benefits in a vacuum don’t necessarily carry the day,” Marcus said. “What I’ve talked about repeatedly is our duty is to maximize shareholder value. From our perspective that could be either as an acquirer, it could be as a seller. We’re focused on the things we can control, which is running our business.”
For employees who had been readying themselves for a transition after the deal was completed — several have retired or moved to other companies, with others referring to the past 14 months as “senior year” — Marcus said the focus always has been on running the business.
“I don’t want to trivialize the challenge that has been presented on the people front, but our team has risen to the occasion,” Marcus said. “They have performed more than admirably, beyond our wildest expectations.”
Marcus added that prior to the February 2014 announcement of the Comcast deal, Time Warner Cable had revamped its management team, adding cable veteran Dinni Jain as chief operating officer, former AOL chief financial officer Artie Minson as CFO and former Cox Business executive Phil Meeks to head up its business services unit.
“On one level, all of these guys, and frankly our entire senior management team, have been champing at the bit to show what we could do if we were left to our own devices,” Marcus said. “In a sense there is a lot of excitement about the opportunity before us.” Marcus said personally, he is as pumped as he has ever been
“Who wouldn’t be gung ho about being CEO of TWC?” Marcus said. “As I sit here today, I’m as gung ho as I’ve ever been.”
