US Cable Market Values Are Hot

Implications: 1. Could Charter, Cox and Cable Vision be targets in the next round of consolidation?  2. Will AT&T look to acquire DIRECTV or Echostar to create a quick fix?

Analysis: Over the last year, shares in Comcast are up 50%. Charter Communications have risen over 300%. The founding family of Cablevision, the Dolan’s, recently made another run at taking the company private. This time they offered $36 a share, which was a 10% premium. The stock price went above this offer as it did their last two offers as shares in the cable firm are up 80% over the last year.

On the other side of the pond, Virgin Media has tapped Goldman Sachs to prepare the company for a possible auction. Virgin Media's largest shareholder is Virgin Group kingpin Richard Branson, who holds a 10.5% stake. The cable and wireless provider was rebranded Virgin Media earlier this year following the merger of Brit cable and telecom concerns NTL and Telewest. The company was approached earlier this year by Providence Equity Partners and other U.S. private equity players about a $15 billion bid. Virgin Media has been struggling since its merger.

Interesting enough the US Cable companies that had been struggling in the stock market until recently have seen a turnaround in their fortunes due to the triple play. These cable companies were in a funk on the stock market, but values of their underlying assets started to climb in mergers and acquisitions pushed by industry insiders about two years ago. Three to five years ago, most cable transactions involved small rural systems with non-upgraded plant that were purchased by private equity companies or MSOs backed by venture capital firms. Cox Enterprises’ $9 bil. acquisition of its cable system affiliate Cox Communications in 2004 set the stage for a possible privatization trend in the cable industry.

The most likely candidates to be purchased during the next phase of consolidation are the medium size players: Charter, Cox and Cablevision each with 3 million to 5.5 million subscribers and APRU growth due to triple play bundling at an annualized rate of 15% to 20%. Charter in particular does not have the capital to fight the phone companies as they come to market with their own TV, broadband and phone product bundles. Its larger siblings, Time Warner Cable and Comcast, do. However, with market values doubling, tripling or quadrupling over the last year, there will be no bargains.

On the other hand, AT&T with its limited U-verse bandwidth may decide to take the quick fix and purchase either DIRECTV or Echostar. A combined solution would allow AT&T’s 26 Mbps to be utilized exclusively for telephone and Internet, thus putting AT&T in a better competitive position in the near term. AT&T could also use either Sat-caster’s partnership with Clearwire Corp. to expand its telephone and Internet footprint.