Fewer, Smaller Deals on Horizon for Cable Industry in 2016

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By Tim McElgunn

Feb. 2—After a busy year for merger and acquisition activity among cable broadband providers last year, 2016 should bring fewer and smaller deals.

With Suddenlink now part of Altice NV's global portfolio, and two deals—Charter Communications, Inc.’s proposed acquisition of Time Warner Cable Inc. and privately-held Bright House Networks, and Altice's buy of Cablevision Systems Inc.—still awaiting regulatory approval, there are no obvious targets—or buyers—remaining among the large cable operators.

Any potential buyers are also likely waiting to see if regulators approve the pending deals and, if so, with what conditions attached.

Roll-ups—where investors build a larger company by acquiring and merging smaller companies— among tier-two and -three operators with less than a million subscribers could pick up, but most of that activity will be driven by venture capital firms and is unlikely to result in the formation of a new company with the size to be a tier-one player.

Meanwhile, with cable industry consolidation slowing, large operators may look further afield and consider whether it makes strategic sense to pursue wireless deals.

Status of Pending Deals

Industry analysts see approval of the two big deals held over into 2016 as probable—but not guaranteed.

In the case of Charter's ambitions to acquire TWC and Bright House—creating the second largest U.S. cable operator—Bloomberg Intelligence Senior Analyst Paul Sweeney expects the deals to go through in spite of potential opposition from regulators concerned about consolidation of the residential and small business broadband markets. If the deal is completed, Comcast and “New Charter” will control approximately 42.3 million residential and small business Internet service subscribers, or about 47 percent of all U.S. broadband Internet subscribers.

The Federal Communications Commission and the Justice Department are vetting the deal for its effect on competition and consumers.

That review may affect other acquisitions as well. If Altice is successful in adding Cablevision to its U.S holdings, it will control an additional 3.7 million subscribers. Add in Cox Communications' 4 million subscribers, and the top four U.S. cable companies will control approximately 56 percent of the market. With the FCC reclassifying broadband as 25 Mbps (megabits per second) downstream—faster than most DSL lines support—cable's market share is even higher than the raw numbers suggest.

That potentially dominant market power likely drove the FCC's decision to pause its informal merger review “shot clock” on the Charter deal, which the agency announced Jan. 4. The informal 180-day clock used by the FCC to complete merger reviews will have 65 days remaining when the pause ends, implying a deadline of late March.

Still, Sweeney said, Charter remains confident that the deal will be approved, arguing that the increased speeds it can deliver to TWC and Bright House subscribers—Charter's base residential service speed is 60 Mbps—is a benefit that offsets any increased market power.

Altice Facing Local Opposition

Even with approval for its acquisition of seventh-largest cable operator Suddenlink, Altice's Cablevision deal has drawn opposition from somewhat unusual sources. Sweeney noted that, “Cablevision does not have a good relationship with a lot of their [state and local] regulators, they have had some problems with some of their unions.” And the company's reputation for aggressive cost cutting—a reputation they embrace, forecasting very optimistic financial and operating benefits for the Cablevision deal—isn't helping. Concerned about job losses, the Communications Workers of America (CWA) is protesting the deal and asking NY state regulators to get involved.

In a filing posted Dec. 23 on the FCC website, Altice and Cablevision defended their proposed merger, accusing the CWA of relying on “mischaracterization and surmise” in criticizing the proposed deal and stressing that the merger would bring about improved broadband service.

Sweeney said, in 25 years of covering the cable industry, he has never seen a state public utility commission have a meaningful impact on a transaction. “In a cable transaction,” he said, “while you have to get local approvals, it is usually pretty pro forma, you just have to say ‘We're not going to stop providing cable service in your area, we'll continue to invest in our cable network and make sure all the people in the community get all the programming they want and need'.”

Still, “What's a little unique about this one is that it is a foreign company, and nobody knows these guys, and what we do know about them is not good: They cut costs, and they don't invest in the plant, and so on,” he added.

Further Consolidation to Feature Smaller Targets

While Altice and even Charter may still be interested in growing through acquisitions after they gain approval for their pending deals, both companies, in the short term, will need to focus executives' attention on combining companies and infrastructure, a process that will likely take many months. Even when they are ready, potential targets will be hard to find.

With TWC, Bright House, Cablevision and Suddenlink all off the market for now, Cox Communications is the only U.S. cable operator of significant size that remains a potential merger-and-aquisitions target. The operator is privately held by Cox Enterprises, which has said that it is not interested in a sale.

That leaves the tier-two and smaller operators—only Mediacom serves more than a million subscribers—most of which are privately held. While venture capital firms have been buying and combining some smaller operators, the number of deals required to build a company that can compete beyond a limited number of small markets —and attract investors—makes that segment of the market less attractive to buyers looking for a quick payoff.

Sweeney thinks industry consolidation has peaked in terms of dollar amounts. He expects to see some smaller deals, “particularly if interest rates remain relatively low,” he said, adding that the “leveraged credit market, the high-yield loan market, loves the cable industry.”

Is Wireless in Cable's Sights?

With consolidation largely complete and subscriber and revenue growth slowing, the large cable operators and their investors are looking to wireless to drive new growth.

While their wireless offerings for now are limited to Wi-Fi-powered “nomadic” services, Comcast and Charter are exploring additional avenues to add true mobility to their service bundles.

Charter Communications CEO Thomas Rutledge told a Dec. 7 investor conference in New York, “We think there is more than one path” to offering a mobile service. Rutledge said Charter is focused first on building out its Wi-Fi infrastructure to support a “sedentary wireless environment.” But that is not the end of the company's wireless ambitions.

Rutledge said that Charter will “be stepping into an MVNO relationship,” referring to an existing mobile virtual network operator agreement between Time Warner Cable and Verizon Wireless. When Verizon Wireless purchased advanced wireless service (AWS) licenses from Comcast, Bright House and TWC for $3.6 billion in 2011, the companies agreed to a deal that gave them the option to lease wireless capacity from Verizon to operate as MVNOs, selling services directly to their own subscribers. The MVNO agreement would pass to “New Charter” following the planned acquisition of TWC, allowing the company to offer a mobile wireless voice and data service to its customers using spectrum leased from Verizon.

Comcast also recently announced that it has exercised that option but has not yet announced any mobile wireless service offerings.

BI's Sweeney said, “Probably one of the key issues of 2016 for the cable [companies] is, `What is their wireless strategy going to be?'”

The MVNO model is a stopgap solution for the cable operators, if they really want to succeed as wireless competitors, opening the possibility of Charter or Comcast choosing to buy, rather than build, a wireless provider.

“Comcast and a lot of the others are talking about an MVNO and leveraging off their WiFi hotspots and the question is, is that a viable wireless strategy?” Sweeney said. “Does that give you a quad play offering? The [telecommunications companies] say `no', and that gives rise to speculation that Comcast might make a run at T-Mobile to get that wireless solution.”

Comcast, or Charter, would likely face little regulatory opposition to such a deal, which would make the acquired wireless provider more competitive with industry leaders AT&T and Verizon Wireless.

Building a wireless carrier from scratch is the least likely –and least likely viable—option. Charter's Rutledge is not yet willing to write it off entirely, however. Asked at the December conference if he sees Charter's wireless strategy confined to WiFi, Rutledge pointed to the FCC's incentive spectrum auction planned for early next year.

“There is an auction coming up, difficult for us to participate in that right now because we're not sure when we're going to close” the TWC/BH deal, he said.

Whether or not it participates directly in the upcoming auction, however, Rutledge plans to explore all of his options with regard to developing a wireless strategy.

“We're not sure of a lot of things,” Rutledge said, “but we're certainly interested in the future of our relationship to spectrum and how we might get spectrum.”

To contact the reporter on this story: Tim McElgunn in New Jersey at tmcelgunn@bna.com

To contact the editor responsible for this story: Keith Perine in Washington at kperine@bna.com