Distribution

Four for the Money

Consolidation wave creates a top-heavy list of pay TV’s largest players 2/27/2017 8:00 AM Eastern
TakeAway

With a period of industry consolidation winding down, the biggest U.S. pay TV players are bigger than ever.

Today's list of top 25 MVPDs may be the face of pay TV distribution for several years to come.

Consolidation hasn’t broken up all of the old cable gang just yet, but it has shifted the rankings of the top pay TV providers in the country. New entrants such as Texas Pacific Group, which bought Grande Communications and RCN last year, have come on the scene, as old stalwart Charter Communications, which closed on its purchases of Time Warner Cable and Bright House Networks in May, more than quadrupled its size.

But as AT&T — the biggest distributor for the second year running — now looks toward content with its pending mega-purchase of Time Warner Inc., some observers believe the age of consolidation has ended almost before it really had a chance to start.

“The industry is exiting a period of unprecedented consolidation among pay TV distributors,” Morgan Stanley media analyst Ben Swinburne said in a recent research note. “From [2015] to [2017], two major mergers led to media companies suffering from significant reductions in distribution fees, but the industry is now lapping those effects.”

The “Core Four” of AT&T, Comcast, Charter and Dish Network are expected to hold their positions for the foreseeable future, partly because none are likely to be involved in any major distribution deals in the near term and partly because if they are on the hunt for additional scale, the resulting deals probably wouldn’t move the needle much.

See the full list of Top 25 MVPDs.

BEYOND THESE: 635 MORE
The top four MVPDs control more than 80% of the 96.7 million homes represented on the list. Overall, the 25 service providers control about 96.7 million homes, or about 88% of the 110 million U.S. TV homes. With that much power concentrated in the Top 25, that doesn’t leave much for the 635 other cable operators across the country.

So unless another mega-deal is in the cards — and, despite the notion of the Trump administration’s laissez-faire attitude toward mergers, any deals involving the top four MVPDs will more likely involve a wireless provider than a pay TV distributor — the list might stand pat for at least a while.

That theory was tested earlier this month when reports surfaced that Verizon (No. 5) had approached Charter (No. 3) about a possible hookup. But even if you disregard potential regulatory and financial hurdles — most analysts think it would cost too much — combining Charter with Verizon wouldn’t push the combined company past Comcast on the list.

So much for the transformative power of scale.

“It’s hard to envision any more large-scale M&A, outside of possible wireless deals, for the next few years,” MoffettNathanson principal and senior analyst Craig Moffett toldMultichannel News. “Altice might be able to scoop up a few smaller players, but the top end of the industry is probably intractable.”

And there have been deals in the wake of Charter’s $90 billion (combined) purchase of Time Warner Cable and Bright House Networks. European telecom company Altice N.V. made the biggest splash: It snapped up Suddenlink Communications for $9.1 billion in December 2015, adding Cablevision Systems’s nearly 3 million New York-area subscribers less than a year later (June 2016) for $17.7 billion. Altice is currently taking a breather, but it could be a major player if it goes ahead with an expected initial public offering of a minority stake later this year, which could go toward cashing out some investors and providing a currency for further deals.

The year also saw new entrants (Texas Pacific Group’s $2.25 billion purchase of Grande and RCN), the return of old friends (Crestview Partners’s recapitalization of WideOpenWest) and surprises (Cable One’s $735 million purchase of NewWave Communications).

Most analysts had expected Cable One to be a seller. The midsized Phoenix-based operator embarked on a broadband-centric strategy about four years ago, forgoing cable subscriber growth to concentrate on higher-margin broadband customers. Since then, Cable One’s video customer base has dwindled from nearly 600,000 in 2012 to 329,386 in the third quarter of 2016, the latest information available. At the same time, broadband customers have grown from 459,000 in 2012 to 461,000 in the third quarter.

Meanwhile, telcos such as AT&T, which have also seen video declines, are turning their eye toward content. AT&T in October agreed to purchase Time Warner in a deal that (including debt) will set it back about $108.7 billion.

CINCY BELL MOVES UP
On the distribution side, consolidation in the wake of the Charter-TWC deal has transformed the bottom half of the Top 25 list. New entrants like Cincinnati Bell, which wouldn’t have broken the top 25 five years ago, debuted on this year’s list at No. 21.

Other telcos that have had strong past showings may be throwing in the traditional pay TV towel for an over-the-top strategy. CenturyLink’s Prism TV, which has been a steady presence in the IPTV arena, rose to 13th place this year from the No. 16 spot in 2015. But the company, citing increasing programming costs, is “de-emphasizing” IPTV in favor of Prism Stream, a new OTT product set to launch in the second quarter.

But as Moffett said, all could change — at least for the bottom half of the list — if Altice goes through with its planned IPO of a minority stake in its U.S. assets.

Telsey Advisory Group media analyst Tom Eagan expects the Altice IPO will not only unlock value — assuming mid-8-times-cashflow multiples on the other divisions, the implied value for the USA group is negative — but also could be used as currency to acquire other cable systems. Possible targets could be Cox Communciations and Mediacom Communications, Eagan speculated.

“Of course, they could split the targeted systems up with another cable buyer if they didn’t want to take on the incremental debt load alone,” Eagan said in an email message.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak agrees that more deals are to be done involving smaller companies outside the top five on the list, led by Altice, which he believes has the most capacity to bid aggressively for assets.

“Altice’s involvement in the U.S. is a game-changer, given their ability to take significant costs out of the business and upgrade their plant at dramatically lower costs than their peers,” Wlodarczak said.

Adding to the pressure to gain scale are rising programming costs, which puts smaller operators “in a position of either selling to a player such as Altice or moving to data-only (Cable One) strategy,” he said.

The political environment also could play a role in cable companies deciding whether or not it’s worthwhile to combine. And that’s not only because of regulatory changes expected in the Trump administration and a more favorable stance on big business combinations.

“Perhaps the biggest wildcard for consolidation among the smaller players is tax reform,” Moffett said. “Depending on how things break in Washington, you could imagine that the tax code could create a window that would make it hard for family-owned cable operators not to at least consider cashing out.”

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