Wait till next year for consolidation: in the cable industry, the big fish are putting off their next big meals—meaning smaller deals are further away, too

Cable World, Nov 26, 2001 by Mavis Scanlon

All talk and no action seems an apt description of the mergers and acquisitions market these days for MSOs.

The mid- to late-90s saw an intense period of consolidation that put about 85% of cable subscribers in the hands of the top ten largest companies. As MSOs integrated large acquisitions, merger activity slowed. In July, that seemed about to change, with Comcast's unsolicited bid for AT&T Broadband, the country's largest MSO. Now, due to the events of Sept. 11, the market for mergers and acquisitions in the MSO space is again in a lull.

Before the terrorist attacks, the cable industry stood on the verge of sweeping ownership changes: The sale of AT&T Broadband would have spurred deals in small and midsize markets as MSOs began to better position themselves geographically. Now it's unlikely any deals will take place before the end of the year.

"It seems like ever since the terrorist attacks everything has slowed down," says Pat Thompson, an SVP at cable investment bank Daniels & Associates. The uncertainty hanging over the markets from the war in Afghanistan and a recession is making buyers shy away from committing to deals, Thompson says. Conversations between buyers and sellers are ongoing, she adds, but "nobody is making any kinds of commitments at this point."

"There is a lot of uncertainty in the industry," says Keith Kennebeck, a senior analyst at the Strategis Group.

John Martin, a cable industry analyst at ABN Amro, says he would not be surprised if AT&T's decision on its cable unit were delayed until early next year. Once the fate of AT&T Broadband is decided, however, other deals are sure to follow.

"If [the sale happens], everything changes," he says. "If AT&T Broadband winds up merging with another leading provider it will be a cause for most cable operators to rethink whether their footprint is large enough."

Right now there are mixed messages coming from AT&T, says Strategis's Kennebeck. On the one hand, AT&T CEO Michael Armstrong just installed a new management team at AT&T Broadband, signaling that the company is angling to run the cable unit itself. But Kennebeck says that Armstrong and the board may still be willing to sell to the highest bidder.

Earlier this month, AOL Time Warner signed a confidentiality pact with AT&T Broadband, which allows the two companies to begin more in-depth negotiations. AT&T Broadband had previously signed confidentiality pacts with Cox Communications and Comcast.

Kennebeck says he expects a status announcement from AT&T in the next few weeks, which could include a comment on whether Comcast has increased its offer for AT&T Broadband. When made in July, Comcast's stock and assumption of debt offer was valued at $58 billion; it has since decreased to about $54 billion.

Both AT&T and Comcast declined to comment.

The need to roll out new services on a large, and thus economical, scale is driving consolidation. Operators expect to derive future revenue growth from the delivery of these services.

Most consolidation is expected to be concentrated among the top ten MSOs. Kennebeck says that once the current economic slump ends, he "would not be surprised to see some of the smaller, appealing MSOs bought up by top MSOs."

Cablevision Systems, with about 3 million subscribers concentrated in the New York area, Insight Communications, with 1.4 million subscribers, and Mediacom Communications, with 1.6 million subscribers, are all mentioned as acquisition candidates, despite no indications from the companies that they would be willing to sell.

There is less of a focus on the rest of the top 25 MSOs, if only because their numbers of subscribers are small relative to their larger brethren. But if a system is geographically attractive and would bolster a company's long-term prospects, then an MSO would consider buying it, Kennebeck says--no matter the number of subscribers.

Best Industry Footprint?

AT&T says it has the best industry footprint, with the largest percentage of its subscribers clustered in the top 25 DMAs (demographic market areas). Analysts say smaller deals are sure to be a by-product if and when the giant cable company is sold.

SOURCE: AT&T

The rankings on the following pages are based on the Top 25 MSO list compiled by Kagan World Media from basic subscriber counts as of June 30, 2001. CableWorld updated the numbers and ranking where possible with information compiled from third-quarter earnings reports and data provided by the companies.