Here’s Why Liberty’s John Malone is Pushing Cable Consolidation

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Cable television providers are rushing toward consolidation, but that trend has little to do with television. What is at issue is cable, and the importance of infrastructural assets is clear in the attention that Wall Street is paying the possible acquisition of Time Warner Cable (NYSE:TWC).

While the purchase price is still an issue, Liberty Media’s (NASDAQ:LMCA)(NASDAQ:LMCB) offer to buy out the minority shareholders in satellite radio provider Sirius XM (NASDAQ:SIRI) would give Chairman John Malone greater financial flexibility to pursue the acquisition of Time Warner Cable, the second-largest U.S. cable provider. Time Warner may not be bought by Charter Communications (NASDAQ:CHTR) and its parent company, Liberty Media, but experts speak of consolidation as the savior of the industry.

For the telecommunications companies that were once powerhouses of the cable television world, cable is the infrastructural asset that will carry them into the future. The future will have little to do with linear, traditional video and much to do with media streamed from the Internet. Interest in cable television is on the downtrend, and subscribers are canceling.

The past year was the worst on record for the pay-TV industry in terms of customer retention. According to research firm MoffettNathanson, 113,000 subscribers of pay-TV packages offered by cable, satellite, and phone companies canceled their service. For comparison, just 80,000 subscribers were lost during the 12-month period ended March 31.

Even that figure was concerning, because it marked the first time a net industrywide subscriber loss had been recorded for a four-quarter period since Leichtman Research Group began tracking the data a decade ago.

At the heart of subscriber loss is the affordability and ease of Internet-based entertainment. Interest in online streaming services like Hulu or Netflix (NASDAQ:NFLX), which give users access to a vast library of on-demand movies and television shows, have boosted demand for broadband. While cords may be getting cut on cable subscriptions, cable providers and telcos added more than half a million high-speed Internet customers in the third quarter.

Declining subscriber numbers have yet to hurt providers’ bottom lines, but it is clear-cord cutting is becoming a trend, and cable companies are already well-positioned for the change in the industry — they have the fastest route into a majority of houses in the United States and a deep footprint throughout the country.

If consolidation continues, cable companies, which are looking to meter broadband, will be able to create a more unified pay structure, thus stabilizing the market. As it stands, cable television networks are unique because providers typically do not compete with each other directly, having carved out geographical niches.

One of the main advocates for industry consolidation is Liberty’s Malone. Wall Street has expected Charter to submit an offer for Time Warner Cable for a while now. Though Charter has not yet indicated whether it will make an offer for Time Warner, the cable provider’s chief operating officer and soon-to-be CEO, Rob Marcus, has told shareholders he is the right man to decide whether to sell the company.

Even more importantly, Bloomberg learned through a source that the company would probably accept a bid of between $150 to $160 per share. That price would value the company at as much as $45 billion, or about 17 percent above its current market capitalization of $38.30 billion, a figure that has jumped this year as a result of the merger speculation.

However, Charter’s bid will likely be closer to $130 per share. In fact, Liberty Media Chief Executive Greg Maffei told CNBC on Monday morning that he would be surprised if anyone made an offer of $150 per share to $155 per share for Time Warner. “I’d be surprised if there’s a buyer out there at that price,” he said.

During a Friday conference call with investors after the Sirius XM proposal was announced, Maffei said the company’s potential takeover of the remaining stake in Sirius XM would give it access to capital to put toward acquisitions and would likely close before “anything that Charter was able to do with Time Warner.”

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