February 20, 2014

The Mega Comcast/TWC Merger – What Does Mr. Malone Do Now?

When Comcast and Time Warner Cable announced their big merger last week, one of the first questions on my mind (and perhaps on yours, as well) was “How does this impact John Malone and what does he do now?”

Mr. Malone, after all, was the catalyst for this merger. He was the first to try and buy TWC, hoping to merge it with Charter Communications (Malone’s Liberty Media acquired a 27% interest in Charter in May 2013), which no doubt ultimately spurred Comcast to make its move.

So, how does this impact John Malone – one of the cable industry’s true pioneers – and what’s he likely to do next?

It seems to me that any answer to this question must be informed by Malone’s past history, plus the current strategies employed by (his) Liberty Global rollup of international MVPDs. Plus, since I’m feeling conspiratorial today, my look at Mr. Malone’s past and present leads me to think that maybe he really didn’t want Charter to merge with Time Warner Cable to begin with.

For one, the Charter/TWC merger would have been out of character for a John Malone deal. When Liberty Media bought its 27% stake in Charter last May, Malone said in a statement that “Charter is a very sheltered asset. There’s not a lot of Verizon, Google, or other competing [operators] in their areas.”

On the other hand, Time Warner Cable seems to be a very “non-sheltered” asset, heavily deployed in large DMAs (especially the New York City and Los Angeles metros) and has been getting hit hard by subscriber defections, many of whom are likely going to AT&T and Verizon.

Ironically (or not), according to Bloomberg, Charter is the one that brought Comcast into the deal. It had been negotiating terms of a post-Charter/TWC merger asset sale when talks broke down. Bloomberg says Comcast’s CFO “stormed out,” threatening to buy TWC without Charter, which is what it did (pending the details of federal approval).

Continuing my conspiratorial bent, a Comcast/TWC merger could work out well for Charter and Liberty Media. First, Comcast and TWC are going to be tied up for a long while in intense regulatory scrutiny from the Department of Justice, the FCC, and Congress (among others). As well, Comcast is likely to emerge with a variety of agreed-to operational restrictions, just as it did with the Comcast/NBC Universal merger. Finally, Charter is likely to be the go-to candidate for buying up the systems with three million subscribers that Comcast says it intends to shed once the deal is completed.

Returning to my earlier question, what does John Malone do now?

I think he reproduces in the US the same strategy that he’s been doing in the rest of the world with Liberty Global: namely, create a roll up of small to mid-size US MVPDs (those that are undervalued or have high debt loads being of particular interest, provided their underlying fundamentals are good). Then, Charter can use these MVPDs to deploy a US version of the highly-innovative Horizon IP/cable hybrid platform that Liberty Global has developed and is aggressively rolling out elsewhere in the world.

Given the brouhaha that the Comcast/TWC merger has already created, Charter M&A deals with small to mid-sized US MVPDs will more easily pass under the radar. As will the complex financial deal structures that will probably accompany them (a Malone trademark – deals so complicated only he and a few mountaintop mystics in Nepal understand them).

So, even though John Malone is the largest private landholder in the US (really), he won’t be riding off into the sunset, at least figuratively, anytime soon. And I’m glad. He is a good candidate to shake up the US MVPD business through technological innovation, while also speeding the availability of a modern TV platform to the small/mid-sized communities that the “big guys” are likely to overlook.

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