Consolidation Looming in the Cable TV Sector?

Weekly Corporate Growth Report, May 10, 2004 by Dolbeck, Andrew

Is consolidation on the horizon for the cable television sector? Adelphia Communications, which provides cable TV service to about 5.3 million subscribers in 30 US states and Puerto Rico, voted in April to explore the possibility of selling the company. If it is sold in its entirety, Adelphia could fetch as much as $20 billion. Comcast's recent $54.1 billion offer for Walt Disney Co. was, at least in part, a bid to combine Disney's library of content with Comcast's cable distribution systems. Comcast would also have acquired cable channel stakes owned by Disney. With deals as big as these under consideration, it's worth looking into the possibilities of further consolidation in the industry.

There's a reason for growing interest in the cable sector - money is being made. Cable companies are expected to begin producing free cash flow. After completing expensive upgrades in cable networks, the industry is expected to reap cash benefits for shareholders. The industry is also making technological innovations that could provide improved service to customers, help the sector compete with satellite TV providers, and increase the industry's overall financial performance.

The industry has been delivering good operating results. Comcast and Cox Communications, in their reported earnings statements, both announced high expectations for 2004 percentage revenue growth. Potential revenue gains in the industry make it a much more tempting target.

Potential buyers within the industry having more available cash also increases the possibility of acquisitions. Buyers should act with a caution, however Comcast's bid for Disney hurt the cable company's stock value. Comcast's share value dropped 16 percent when the company's offer for Disney was announced, and it stayed low until the offer was pulled. Investors feared that the company's prospective free cash flow was being spent before it was even generated.

Comcast wasn't the only company impacted by the Disney bid. Cablevision Systems stock declined by 15 percent and Cox Communications fell by six percent. The decline was driven by market concerns that cable companies may be tempted to stray from their current operating objectives in favor of pursuing acquisitions.

The industry is giving investors good reasons for such speculation. Cable industry executives speaking at the recent National Cable & Telecommunications annual convention expressed interest in furthering industry consolidation. Executives from Charter Communications, Comcast, and Time Warner expressed interest in acquiring operations of Adelphia or Cablevision Systems Corporation. "We particularly like the cable business and said before that we have an interest, at the right time and of course the right price, in expanding our presence in the cable business," stated Richard Parsons, the chief executive of Time Warner.

Although Comcast has abandoned its bid for Disney, the cable giant clearly left the door open for other opportunities for either acquisitions or partnerships. Brian Roberts, Comcast's chief executive stated that the company had not abandoned the strategy of working with content providers. Roberts suggested that Comcast would be most interested in acquiring certain segments of Adelphia's systems. In a similar fashion, Cox Communications has stated that it would not be interested in buying all of Adelphia but has left open the possibility of bidding on parts of the company if it is broken up.

Is consolidation on the horizon for the cable television sector? With the stock market clearly nervous about wholesale acquisitions spending and industry executives eyeing bankrupt Adelphia's individual systems and divisions, the acquisition of specific cable sector assets seems more likely than full consolidation, at least in the short term. If the industry's profits grow as expected, however, industry consolidation will certainly be a tempting possibility over time.

Source: Barren's, Hoover's, Wall Street Journal

By Andrew Dolbeck

Editor