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Twitter After a two-year pursuit, it looks like John Malone finally claimed his prize: Time Warner Cable (NYSE: TWC).
Charter Communications (NASDAQ: CHTR) announced Tuesday that it struck a $55 billion cash-and-stock deal for Time Warner Cable. Charter is backed by Malone’s Liberty Broadband (NASDAQ: LBRDK).
As part of the Time Warner Cable deal, Charter is also merging with Bright House Networks, a small cable operator. The newly combined company, pending regulatory approval, will have more than 23 million customers. That would be second only to the 27 million customer base for Comcast (NASDAQ: CMCSA).
The latest deal emphasizes the industry’s move toward consolidation – a trend Malone has espoused since his return to the U.S. cable market. Malone, dubbed the “godfather of U.S. cable,” left the market in 1998 when he sold Tele-Communications Inc. to AT&T (NYSE: T) and concentrated his efforts on the European cable market. He returned in 2013 when he took a stake in Charter.
Malone’s return could not come at a better time. Who better to lead the industry during a time when it is losing customers?
According to MoffettNathanson Research, over the past 12 months the U.S. cable industry shrank by 0.5%. The firm said that is the fastest rate of decline ever.
Between industry leader Comcast and Time Warner Cable, nearly 4.4 million television customers were lost from 2006 though 2014.
Part of the reason for the falloff is a move away from cable toward offerings from satellite TV and telecom providers. But the real worrisome trend for cable is consumers moving away from just regular TV toward streaming Internet services, such as those offered by Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN).
Another headache the industry faces is the rising pricing power of content providers. Malone controls premium cable channel Starz (NASDAQ: STRZA) and sits on the board of Lions Gate Entertainment (NYSE: LGF). So he is well-informed and positioned to be a major player in the evolution of the cable, Internet and broadband industries.
The Charter-Time Warner Cable deal has a better chance of passing regulatory muster than the failed Comcast-TWC merger, which was officially abandoned by Comcast in April. The Comcast deal would have resulted in a company controlling 40% of the high-speed Internet market. The Federal Communications Commission and U.S. Justice Department said this was a key sticking point in its rejection of the proposed merger.
The deal with Charter and Time Warner Cable will result in a company controlling 20% of the broadband market. Nevertheless, do not be surprised if the regulators request that some assets be sold to gain approval.
Consolidation Is Here to Stay
Even if regulators happen to turn a thumbs down on the deal, consolidation in the industry is here to stay. That’s because another player has entered the market.
Patrick Drahi of the European company Altice considers John Malone to be his mentor. He uses Malone’s methods (involving cheap debt and cost cutting) almost exactly. And between the two of them, they have built empires by carving up the European cable and broadband markets.
In fact, Drahi’s net worth is said to be double John Malone’s. That is largely due to the fact that he owns 60% of Altice, which is up 350% over the past year.
Drahi has now put his toe into the U.S. market. Earlier in May, he announced a $6.7 billion deal for 70% of cable operator Suddenlink. The U.S. will now account for 12% of Altice’s sales.
Drahi’s goal? To be as major a consolidator of the U.S. cable industry as he was in Europe. His aim is to make the U.S. responsible for about half of Altice’s sales.
It’s not surprising then that Drahi said that in the U.S. everything “below Comcast effectively is in consolidation mode.” I’m sure this would include any assets sold off by a merged Charter-Time Warner entity.
Drahi’s words must sound like sweet music to the shareholders of Cablevision Systems (NYSE: CVC). It also puts Cable One in play, which is due to be spun off by Graham Holdings (NYSE: GHC) later this year. Shareholders just have to sit back and wait for a bid to come in.
Between John Malone and Patrick Drahi, industry consolidation is a given. This should continue to boost the stocks of both billionaires’ companies as long as the trend is in place.
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