The Liberty Media chairman is poised to leverage his stake in Charter into an M&A machine capable of ensnaring Time Warner Cable
Before there was Comcast or DirecTV, there was Tele-Communications Inc. Its founder, John Malone, built TCI into the biggest pay TV provider in the U.S. through the 1970s and 1980s.
Now 72 years old, Malone may be preparing to repeat that feat.
The rumblings reached a crescendo at the annual Cable Show earlier this month that the Liberty Media chairman will use the 27% stake of Charter Communications he purchased in March to acquire other U.S. cable operators — potentially even the second-biggest, Time Warner Cable. Reports have suggested Liberty has already engaged TW Cable in merger talks, but nothing is in the offing yet. Other possibilities include smaller properties Cox Communications, Cablevision and Media One.
But sources close to Malone say he’s ready for the kind of mergers-and-acquisitions binge that has long been his specialty. “John is all about scale, and a roll-up play or acquisition would bring scale to Charter,” said one insider.
Malone laid out the rationale for his interest in TW Cable at Liberty’s annual shareholders meeting earlier this month, where he touched on everything from the need for greater scale to contain sky-high programming costs to the importance of broadband to the business’ future. “As more content goes over the top, the ability to provide flexible, high-speed connectivity will become the dominant trait,” Malone said.
Sources said that in the past, Malone has feared regulation and competition, specifically regarding telcos like Verizon and AT&T. But he’s gotten more comfortable with the resilience of his distribution businesses abroad — U.K.-based Virgin Media is among Liberty’s overseas cable holdings — and more willing to give the domestic landscape another go.
Over the past decade, the cable industry has consolidated into six major players that control 85% of the U.S. market: Comcast, TW Cable, Cox Communications, Charter, Cablevision Systems and Bright House Networks. Industry observers have speculated that additional consolidation could be in the offing. One routinely cited scenario: a Time Warner Cable takeover of Cablevision (which spans suburban New York, with most of the Big Apple served by TW Cable).
In 2012, Time Warner Cable closed the $3 billion acquisition of Insight Communications, a midsize operator with about 760,000 customers. In 2010, Cablevision paid $1.4 billion for Bresnan Communications, with about 300,000 customers in rural areas of Colorado, Wyoming, Utah and Montana, then sold those systems in February for slightly more than $1.6 billion to Charter.
Companies that have eyed Time Warner Cable have included Cox, which went private in 2004, and had internally considered making a play for the cabler on multiple occasions, according to an industry exec with knowledge of Cox’s strategy. But Jim Kennedy, chairman of parent Cox Enterprises, did not want to return to the public markets to facilitate such a transaction.
Meanwhile, at TW Cable, the board of directors has a big decision to make, with company chairman and CEO Glenn Britt set to retire at the end of the year. The leading internal candidate to replace him at this time is president and chief operating officer Rob Marcus.
That means the board has two options when Britt retires: Elevate an untested CEO to oversee a company with a share price that analysts have criticized as inflated because of share buybacks, or get a premium for the company’s current-market trading value. A merger or acquisition would more than likely lead to money for shareholders in a tax-free transaction. And the combined Charter/TW Cable would have a bigger footprint and a tax-advantaged situation generating accretive cashflow immediately.
Should Charter get a hold of TW Cable, it would no doubt benefit from the stewardship of Charter CEO Tom Rutledge, who is widely regarded as one of the cable industry’s most capable leaders. Rutledge previously led Cablevision along with his COO, John Bickham, who happens to have spent time in the executive ranks of TW Cable as well.
There would be no specific regulatory concerns in a TW Cable-Charter merger, according to industry execs. A combined TW Cable/Charter would have about 16 million video subscribers — still far less than Comcast, which had about 21.9 million at the end of the first quarter.
At this juncture, Malone doesn’t control enough of Charter to make a run at TW Cable; he is barred from taking more than a 35% stake in Charter until 2016.
But Charter’s 2009 bankruptcy could wind up helping Malone now. It means his stake this year came with a significant net operating loss carry forward — an accounting instrument that gives businesses a tax shield on future income if they’ve sustained a qualifying loss. For example, Charter could use its NOL to offset taxes it would incur if it were to buy TW Cable.
There are limits on the usability of such losses, including their seven-year expiration date and the fact that they can be used only on similar businesses.
Because of Malone’s net operating loss from Charter — which some insiders estimate to be in the $3 billion range — he may be able to pay a premium for TW Cable, or any other cable asset he fancies. And creative tax structures are right up Malone’s alley: Sophisticated accounting helped him buy Virgin, for example. With TW Cable, he’d get a tax-advantaged asset and a public stock that has performed well.
Malone’s thesis is, if you’ve got a maturing industry that still generates pretty good cash-flow capabilities and has massive economies of scale, there’s a lot of money that can be made — in this case by rolling up cable properties at a good price.