While the pay TV M&A market held out the promise in 2014 that it would be one of the most robust ever as Charter Communications pursued Time Warner Cable and drove renewed interest in further consolidating the industry, it turned out to be one of the slowest years in terms of deal volume in recent memory.
But with two mega-transactions nearing the finish line in 2015 — Comcast’s $69 billion acquisition of Time Warner Cable and AT&T’s $67 billion purchase of DirecTV — the consolidation floodgates are expected to begin to open.
According to two top dealmakers — Waller Capital president Garrett Baker and RBC Capital Markets director Mike Talamantes — cable operators and private- equity players are expected to focus on deals to boost their commercial services business, while some midsized operators will continue to seek out scale by acquiring smaller properties.
But the level of activity will continue to hinge on when and whether the Comcast-TWC deal is completed.
“There has been some stagnation in the number of cable owners that are trying to sell their assets due to uncertainty about Comcast and Charter’s willingness and ability to acquire assets right now because of the Time Warner [Cable] deal,” Baker said in an interview. But he added that with the Comcast deal completed, those players relegated in the past year to the sidelines will re-enter the game.
“There had been more new entrants into the domestic cable market in the past two years than any two-year period I can recall,” Baker said. “All of those entrants want to buy more cable than they already own. Therefore, I don’t think there will be a significant number of new entrants, but those that have already bought in are going to be aggressively looking to find other things to buy.”
Talamantes agreed, adding that the scarcity of assets helped lead to a paucity of deals in 2014. He expects many of the same players that were kicking the tires on cable assets in the past few years to make a return.
“Where private equity is going to play is where they have existing platforms,” Talamantes said. “There are a lot of buyers that have come into the market. We haven’t seen a lot of new private equity money recently, but there is a lot of money on the sidelines.”
The RBC Capital executive believes that once the dust clears from the Comcast- TWC deal, those players will have more places to put their capital.
“The dynamic you have in the M&A market right now is you have a complete lack of quality properties, you’ve got strong capital markets and you’ve got a lot of buyers chasing very few properties,” Talamantes said. “The combination of all those things certainly have supported the valuations over the last year and I think will continue to do so in 2015.”
Comcast agreed in February to acquire TWC in an all-stock deal, effectively snatching the second largest cable operator in the country from Charter, which had pursued a deal for most of last year. While Comcast may have bested Charter’s offer — its $158.82 per share all-stock bid dwarfed the Connecticut company’s $132.50 per share bid — it also agreed to a series of swaps, sales and spins that will double Charter’s footprint to about 7 million homes while creating a new publicly traded player in GreatLand Connections. Great- Land will have about 2.5 million subscribers and will be 33% owned by Charter.
In addition, Graham Holdings, the parent of Phoenix-based cable operator Cable One, announced plans late last year to spin off the cable company as a separate publicly traded entity. Whether that deal will make Cable One a buyer or a seller still remains to be seen.
Charter, which proved its desire to gain scale with its near-relentless pursuit of Time Warner Cable last year, is expected to continue that track, possibly by acquiring a midsized operator. Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak speculated that Cablevision Systems, with about 3 million subscribers in the New York metropolitan area and the former employer of Charter CEO Tom Rutledge, could be a possible target.
Others see more activity on the programming side in an effort to shield themselves from what will be a 29 million-subscriber behemoth in the combined Comcast-Time Warner Cable. Telsey Advisory Group media analyst Tom Eagan told clients that one of the best bets for a programming deal this year includes Viacom possibly reuniting with its former broadcast subsidiary, CBS.
But while Charter and other larger players will likely focus on billion-dollar-plus deals, the rest of the sector will concentrate on adding to their existing portfolios.
Despite all the hype that surrounded Comcast, Time Warner Cable and Charter and later AT&T and DirecTV, Baker said that 2014 was one of the worst years for smaller cable deals.
FEWER, BIGGER DEALS
“2011, 2012 and 2013 were big deal-volume years for midmarket cable,” Baker said. “2014 was down in terms of total transactions. We probably won’t see the same number of deals close this year, but I think you’ll see that same level of activity by the second half of the year.”
While midsized and smaller operators could be targets, both Baker and Talamantes expect operators to look hard at fiber companies and data centers to beef up their high-margin commercial services offerings, which have enjoyed consistent double digit growth rates even for smaller operators. Both Baker and Talamantes believe that smaller players that were active in the deal market before the Comcast-TWC hook up will re-enter the fray.
Companies that are likely to become active include:
• TDS, which purchased Bend Broadband in September
• GTCR, a private equity boutique that formed Rural Broadband Investments in 2013 to acquire small market systems
• BC Partners, the Canadian private-equity player that invested along with Canadian pension fund CPP Investment Board in Suddenlink Communications in 2012
• Vyve Broadband, formed by two former Bresnan Communications executives in 2013, which purchased about 7,000 subscribers in Oklahoma in a handful of deals in August.
• Cogeco Cable, the Canadian cable operator that bought Atlantic Broadband in 2013
• Schurz Communications, a South Bend, Ind.-based communications company that purchased small market operators Orbitel and Western Broadband in 2012.