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What’s the Best Play for Cable Network Consolidation?

Now that Comcast and Time Warner Cable are merging, expect networks to do a little consolidation of their own.

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The proposed merger of Comcast (CMCSA) and Time Warner Cable (TWC) will create a cable distribution colossus with 30 million subscribers. That’s almost seven times as many customers as its next biggest rival. Content providers worry that a bigger Comcast means less room for negotiation when it comes to fees. For bigger firms such as Disney (DIS), it could actually be a blessing rather than a curse.

DIS-stock-CMCSA-stock-DISCA-stockIf other cable companies — like Charter Communications (CHTR), Cablevision (CVC) and Cox Communications — decide to merge in order to keep pace with Comcast, content providers could be under the gun once more.

One of the only ways to fight this is by getting bigger. A good example in another industry is Jarden (JAH), a consumer goods business with annual revenues of $7.4 billion. It’s as big as it is in order to be able to provide a larger assortment of products to Walmart (WMT), its biggest customer, representing 20% of overall sales. Without this wide assortment, Bentonville would have to go elsewhere for sales. The same scenario applies to cable and television content.

Content consolidation is coming — it’s only a matter of time. Is DIS stock the best way to play cable network consolidation? While it’s definitely a major player in any future discussion, it’s one of several stocks worthy of your consideration. Here are three possible ways things could play out in the near future.

Most Interesting Deal: DIS Stock

Although it’s the least likely to happen, I could see DIS stock buying the remaining 50% of A&E Networks it doesn’t already own from Hearst Corporation. It would then combine all of its cable content including ESPN into one business which would be spun-off from DIS stock. While any cable consolidation likely won’t affect Disney’s ability to negotiate good fees for its programming (especially ESPN), a focused, independently operated business likely would give it even more clout with Comcast and other providers.

As I stated in my article about an ESPN spinoff, there are several stumbling blocks that could keep this deal from happening. First, DIS stock makes a ton of money from ESPN and, to a lesser extent, its other cable properties. I’m sure it doesn’t want to give up such a profitable business. However, if a deal could be structured that satisfies Hearst — 20% owners of ESPN in addition to their 50% of A&E — and that makes financial sense for DIS stock, it could be a big winner.

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