Time Warner Cable (TWC) and Charter Communications (CHTR) both jumped significantly after last Friday’s report that Time Warner’s CEO was speaking to executives at Charter about selling out.
The report speculates that this is much ado about nothing — TWC doesn’t seem interested in the deal.
But maybe it should be.
Charter Communications provides cable, Internet and telephone services to 5.2 million customers in the U.S. That makes CHTR the fourth-largest company in the industry, but still only a third of Time Warner’s enormous size.
So why is the little fish the one that’s looking to dine?
Charter is partially owned by Liberty Media (LMCB), whose CEO, John Malone, spoke at a shareholder meeting about Charter’s plans for the future. He expressed the company’s intention to become “a horizontal acquisition machine,” targeting other companies in the cable business. This should come as no surprise, given Malone’s long history of acquisitions, which includes takeovers of Virgin Media and Sirius XM Radio.
As Bloomberg points out, consolidation in the cable industry would help companies offset rapidly rising programming costs, which have been a real bane for companies like DirecTV (DTV) and Netflix (NFLX) in addition to cable operators. Consolidation would give Time Warner and rival Comcast (CMCSA) more leverage over those costs.
Indeed, programming is becoming an increasingly important issue for consumers. Back in February, Cablevision (CVC) sued Viacom (VIAB) for violating antitrust laws by bundling popular channels with rarely watched ones. Advocates say the practice inflates customers’ cable bills and denies them the much more popular pick-and-choose option that gained prominence thanks to Apple’s (AAPL) iTunes store.
As consumers get more fed up with cable pricing, they’re cutting cords in favor of online options like Hulu or Amazon’s (AMZN) on-demand services.
Cable providers are rightly worried about the threat of online entertainment, and consolidation seems like a good move to fend it off. A consolidated Time Warner-Charter entity would have more influence over pricing than either company would have on its own. In fact, after news broke about the merger talks, the Chicago Tribune reported on a panel of analysts who predicted more consolidation among cable companies.
But a merger wouldn’t be exclusively beneficial for both companies. Charter would be buying the worst customer service in the cable industry — bad news for a company that took a hit to customer service sentiment after outsourcing the operation. And the acquisition would pile another $15 billion in new debt on Charter’s back, effectively doubling the company’s liabilities.
Again, investors shouldn’t get too excited or worried, as the deal doesn’t seem likely to take off. CNBC noted in its original report that Time Warner Cable didn’t seem particularly interested, and that it even began talks to hire a public relations firm in the event of “a more public onslaught.” It’s a cautious move — and a necessary one in case Charter decides that TWC’s “no thanks” isn’t enough reason to stop its pursuit.
But for now, while a deal might make more sense than Time Warner seems to believe, expect Charter to focus on its other options.
Adam Benjamin is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.