Cable Consolidation on the Horizon

Recent acquisitions by major cable operators are beginning to fuel speculation that more M&A may be on the way. While we may not see the consolidation mania that occurred back in the '90s that put more than 80% of cable subscribers in the hands of the top ten largest companies, it is likely that we will see a significant amount of consolidation over the next couple of years.

Why? Well, major cable operators utilize acquisitions as a growth strategy since their economies of scale can be used to lower costs, increase profitability, and ultimately add to their bottom line. New triple-play offerings by major cable operators (TV, phone, and high-speed internet) also equate to more potential revenues from existing customer bases. And finally, a greater market presence means more pricing and negotiation power, which equates to higher subscriber revenues and lower programming costs. (To learn more, see Mergers And Acquisitions - Another Tool For Traders)

Comcast (Nasdaq:CMCSA) may be the largest cable operator in the United States, but that isn't stopping them from expanding. The company announced two deals worth a combined $2.2 billion this week to expand their presence in New Jersey and the Midwest.

Many are speculating that more deals could be on the way over the next year or two as the company explores ways to effectively utilize its cash and balance sheet to build value.

Time Warner Cable (NYSE:TWC), the United States' second largest cable operator, also said that it sees more consolidation in the cable industry during the next few years and plans to participate when it makes sense. CFO John Martin explained that, while acquisitions are not a strategic imperative, his company would be opportunistic about acquisitions. Time Warner will likely start looking at potential acquisitions as soon as it successfully integrates Adelphia and establishes its stock, which recently IPO'd in March, as a viable currency.

The most obvious target in any consolidation is Cablevision (NYSE:CVC). The New York City cable provider has 3.1 million basic video subscribers and was almost taken private last year by the Dolan family for $8.9 billion or $4,750 per subscriber. Interestingly, that number is $1,250 per subscriber less than Comcast's recent $6,000 per customer acquisition of Patriot Media this week!

Another potential takeover target is Charter Communications (Nasdaq:CHTR), which has about 5.73 million customers. Many investors think Charter would be a natural fit for Time Warner since it would give the company full control over the Los Angeles market. A market it now has a large presence in after its deal with Adelphia.

A third potential target is Mediacom Communications (Nasdaq:MCCC), which has 2.59 million customers. It is worth noting, however, that the company serves several smaller cities and town in the United States, which makes it less appetizing than Cablevision or Charter.


Finally, there are also many smaller public cable operators and a host of private operators that could become acquisition targets for the bigger players. One of the most watched private targets is Cox Communications, while Insight Communications may be another target.

Overall, there is a clear argument for consolidation among cable operators. And with the recent acquisitions by Comcast, the time for M&A may be coming sooner than people first expected.


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