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Talk of Mergers Stirs the Big Players in Cable TV

Michael J. De La Merced and Brian Stelter
Monday, 1 Jul 2013 | 6:02 AM ET
John Malone
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John Malone

Over 40 years, John C. Malone has made his name through countless displays of shrewd deal-making that transformed the telecommunications industry. Now Mr. Malone, the chairman of Liberty Media, appears to be trying to drum up a new round of consolidation in the sector where he first made his fortune.

This time, he is weighing a deal for Time Warner Cable, according to people briefed on the matter who were not authorized to speak publicly. In this deal, Charter Communications, a cable operator in which Liberty owns a 27 percent stake, would buy Time Warner Cable. Should he reach a deal, he will most likely use the combined company to roll up other cable operators, upending a status quo dominated by giants like Comcast.

Those possibilities are helping to build expectations for deals in an industry that investors and some analysts think is ready for more. Mr. Malone has recently become among the most vocal proponents, declaring in April that "there is more consolidation yet to be done."

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Investors and analysts have speculated about transactions involving Cablevision and the privately held Cox Communications, as well as the satellite TV providers Dish Network and DirecTV.

Shares in several paid-television companies have risen in the last month, with stock in Charter and Time Warner Cable jumping by double-digit percentages after media reports about Mr. Malone's interest in a deal.

"Frothy is probably too polite a word" for the current climate, said Craig Moffett, the longtime Sanford C. Bernstein analyst who recently formed his own firm, Moffett Research.

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Behind that push are visions of battles on multiple fronts. Uniting cable or satellite television companies would give them more power in negotiating with programming providers like the Walt Disney Company and Viacom, which are demanding ever-higher rates for their channels.

Mergers could also help blunt new challenges from companies like Intel, which is working on a subscriber TV service that would be delivered via the Internet.

But just as big a target is the broadband Internet service that cable companies also provide. While cable television is mature and will most likely decline in the future, Mr. Malone believes broadband has only one direction to go: up. The emerging online rivals to cable TV, like Netflix and Hulu, require the kind of fast data connections that companies like Charter supply.

Standing before cable executives in Denver last September, at the naming of a theater in his honor, Mr. Malone, 72, praised high-speed Internet as "the stickiest product that I've ever seen." People "would give up food before they would give up the Internet," he added.

One potential source of profits would emerge if the government allowed cable companies to broadly charge their Internet customers more for heavy use of data. Comcast is already testing billing based on use in two small markets. And Mr. Malone told investors last month that cable companies could sell "various tiers of connectivity" in the future.

Other companies have aimed to shake up the field's stalwarts, like Comcast as well as Verizon and AT&T. Dish Network has begun a hunt for merger partners — which so far has failed to land either Sprint Nextel or the wireless network operator Clearwire — in the hopes of creating a new pairing of satellite TV and wireless broadband services.

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Still, Mr. Malone, a former engineer who built TCI into a giant over decades, is one of the oldest hands at wheeling and dealing. People close to him say that he is interested in fostering more cooperation in the cable industry, and in the past he has criticized Comcast, the biggest provider, for what he sees as a lack of initiative.

"He wants to assert some leadership," one of these people said.

At the moment, one way of gaining a bigger podium for his views appears to be in helping Charter pursue a potential deal for Time Warner Cable.

Liberty's chief executive, Gregory Maffei, met with his counterpart at Time Warner Cable, Glenn A. Britt, in late May to sell the benefits of a merger, the people briefed on the matter said. They declined to be named because the talks were private. The meeting didn't conclude with a specific offer, though Mr. Britt was largely unmoved by the approach, which envisioned no takeover premium for his company.

Since then, Liberty and Charter executives have strongly hinted to investors that they remain interested in a deal, done only on a friendly basis, in what observers say appears to be a quiet effort to move Time Warner Cable shareholders into the deal camp.

One person close to Mr. Malone cautioned that Liberty and Charter had not made a firm decision on which companies to pursue yet.

Time Warner Cable's management is skeptical and uninterested, though it would be compelled to consider any offer that delivers a significant takeover premium for shareholders, one of the people briefed on the matter said.

A combination of Charter and Time Warner Cable, which both have nationwide coverage, would have about 15 million television subscribers. That would make it the third-biggest such service in the United States, behind only Comcast and DirecTV. The combined company would be the second-biggest broadband provider, behind Comcast.

A merger would give Charter more regional scale and clout with content providers. Merging with Time Warner Cable could allow Charter to cut programming costs by close to $400 million, according to several analysts.

It would also give the company more money to chase other deals.

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Liberty has also implied that a deal would provide Time Warner Cable with a replacement for Mr. Britt, who is expected to retire this year, in the form of Thomas M. Rutledge, Charter's chief executive and a longtime cable industry executive.

But any deal could be complex. Time Warner Cable's market value is $32.7 billion, nearly three times Charter's $12.5 billion. And Time Warner Cable executives are uncomfortable with many aspects of a potential merger. They are pressing ahead with their own strategic plans; they think Charter's market reach does not necessarily mesh with their own company's; and they may be wary of the amount of debt that a transaction would involve.

Not everyone believes that big-ticket mergers are in the industry's future. Mr. Moffett said he expected more action at the lower end of the marketplace, among the obscure cable companies that would be better off merging. It is there that Mr. Malone may find the most targets.

"The small operators simply can't stand toe-to-toe with the big guys," Mr. Moffett said. Mr. Malone, he added, probably thinks that "Charter is my ticket for the fire sale."

By Michael J. De La Merced and Brian Stelter of the New York Times

(Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.)

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