Acquisitions Could Be on Menu2/22/2004 7:00 PM Eastern
About two years ago, Time Warner Inc. was edged out in the biggest cable auction in history — it lost AT&T Broadband's 11 million subscribers in a heated bidding war with Comcast Corp.
Now the No. 2 U.S. MSO is again expressing its desire to expand its cable footprint.
But one major question lingers: With the dearth of cable properties on the market, how might Time Warner close the subscriber gap between it and No. 1 MSO Comcast, at about twice Time Warner's heft?
With 10.9 million subscribers in some of the most highly clustered markets in the country, Time Warner Cable has heft aplenty. But as the industry shifts focus from video revenue growth to pushing more and more higher-margin new services, growing the base seems almost an imperative.
EYE ON GROWTH
None of that is lost on Time Warner chairman and CEO Richard Parsons who, during the most recent earnings call with analysts, again said Time Warner would look both inside and outside for growth opportunities, with a prudent eye.
The obvious choice for Time Warner Cable would be Cablevision Systems Corp., which has almost 3 million subscribers in the New York metropolitan area. Cablevision, with its concentration of properties in parts of the Bronx, Brooklyn, Queens, Long Island and Northern New Jersey and Connecticut, has long been seen as the “hole in the doughnut” of Time Warner Cable's surrounding Manhattan cable system and would give Time Warner the dominant position in the largest media market in the country.
Time Warner has lusted after Cablevision for years — former CEO Gerald Levin, who resigned in 2001, openly discussed his desire to own Cablevision at industry conferences and annual meetings.
Parsons is likely no different, and after restructuring its balance sheet last year — Time Warner Inc.'s total debt is about $20 billion, $6 billion less than the year before — he has the financial muscle to do a big deal.
MOOT, BRITT SAYS
In an interview for a special report on Time Warner Cable elsewhere in this issue of Multichannel News, MSO chairman and CEO Glenn Britt acknowledged his company's desire to own Cablevision's New York-area cable assets, but said at the moment that's a moot point.
“It [Cablevision] doesn't happen to be for sale; it's hard to buy something that's not for sale,” Britt said. “In our quest to get bigger, we're going to have to see what comes on the market and evaluate it and if we can make a deal that makes economic sense I think we'll do it. I don't think we're going to make silly deals.”
Just what qualifies as silly is up to Time Warner to decide. But Cablevision CEO James Dolan has said in the past if Cablevision does sell out, it won't be cheap.
At a December media conference in New York, Dolan said he wouldn't rule out a sale, but that any consolidation of the New York cable operations would involve a “valuation we have not seen yet.”
Since cable systems were trading at more than $6,000 per subscriber during the height of the consolidation craze of the late 1990s, it's safe to assume that Cablevision would only entertain offers that exceeded that benchmark.
That would set the floor of bidding at $18 billion — a hefty price even for the top media market in the country.
Experts in the investment community see a more likely scenario opening up toward the middle of the year, when Adelphia Communications Corp. is expected to come out of bankruptcy and Charter Communications Inc. could put some non-core systems — or maybe more — on the block.
Adelphia would be attractive in that it operates near some large Time Warner Cable clusters in upstate New York (Buffalo), New England (Vermont and Maine) and the Los Angeles area.
But other Adelphia markets might be too far removed or too expensive for Time Warner to get serious about.
Britt wouldn't speak of any systems in particular, but added that “essentially anybody who comes on the market, whoever that might be, we would have interest in looking at it.”
Stifel Nicolaus & Co. cable analyst Ted Henderson said another possible acquisition target could be Insight Communications Co., which has about 1.4 million subscribers, mostly in the Midwest.
“If you look at where Time Warner operates in the Cincinnati area, they have some interesting matches with Insight,” Henderson said.
“But the reality is that they can't be too aggressive out there, acquisition-wise, because everything hasn't been cleared with the SEC yet,” he said.
Henderson referred to the ongoing Securities and Exchange Commission investigation into some of the accounting practices at Time Warner Inc.'s America Online unit.
“I expect that Time Warner wants to get bigger,” Henderson said. “And I expect that as this industry consolidates down to three, maybe four operators, Time Warner wants to be one of them.”
Insight wouldn't be particularly easy to buy, though, as it's half-owned by Comcast in a partnership called Insight Midwest. Anytime after Dec. 31, 2005, either Comcast or Insight could initiate a split-up.
Aside from expanding the base of customers for selling new services, Henderson added, acquisitions would also level the playing field with Comcast regarding programming costs and vendor contracts.
At 21 million subscribers, Comcast has reduced its programming costs by more than $270 million in just the first year after its acquisition of AT&T Broadband.
“When you start pushing the 15 million subscriber number, that's better than a 10 million subscriber number in terms of your efficiencies and what you can do and how you can manage it,” Henderson said.
|Sizing Up Possible Sellers|
|Adelphia: Has 5.5 million subscribers, including large clusters near Time Warner service areas in Upstate New York, New England and Los Angeles. Currently in Chapter 11 bankruptcy, Adelphia is expected to emerge sometime in June.|
|Charter: Has 6.4 million subscribers across the country, including key areas in New England, Los Angeles and Wisconsin (near Time Warner markets). Saddled with a heavy debtload (about $19 billion), Charter has earmarked 500,000 subscribers in non-core markets for sale to pay off some of that debt and already sold off about 260,000 subscribers in two separate deals last year worth about $856 million. It is speculated that the MSO might be enticed to sell more, as it moves to pare down debt.|
|Insight: Has 1.4 million customers, many in Midwest market areas (including Ohio) where Time Warner has a sizeable presence. But half-owned by Comcast Corp. in a partnership that either side could elect to split up after Dec. 31, 2005.|