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Analysts Debate If John Malone Deal Could Make Charter A U.S. Cable Consolidator

Liberty Global Eyes Polish, Norwegian Cable

Just like Malone’s Liberty Global has acquired cable operators abroad, Charter could drive deals in the U.S., some Wall Street observers say.

With John Malone‘s Liberty Media set to acquire a 27.3 percent stake in cable operator Charter Communications, the latter could become a U.S. acquisition vehicle in the vein of Malone’s Liberty Global, which has been consolidating cable operators in such countries as Germany and the Benelux countries, according to some analysts.

Currently, Liberty Global is in the process of acquiring U.K. cable giant Virgin Media for $23.3 billion.

STORY: John Malone’s Liberty Global Bids $2.5 Billion to Fully Own Belgian Cable Firm

Charter’s stock rose as much as 9 percent Monday amid news that Malone was looking at the cable firm led by CEO Tom Rutledge, a former COO of Cablevision Systems, with the two firms confirming a deal agreement early on Tuesday. Analysts said overnight that the deal could help all cable stocks as it puts a spotlight on the attractiveness of the sector given that Malone used to be a big cable player when he oversaw TCI.

"The transaction has positive implications for cable stocks as it highlights the strength of their subscription-based business, robust free cash flow growth profiles and potential for capital returns," said Macquarie analyst Amy Yong.

STORY: Liberty Media Splits From Starz; Analysts Generally Bullish

Wall Street observers also discussed whether Malone’s decision to take a stake in Charter could kick off a broader acquisition spree by the company in the U.S. cable industry.

Yong said that "Charter [is] likely to consolidate the industry further." She added: "Following the acquisition of Bresnan [Communications by Charter] and due to Charter’s significant tax assets, the company will likely continue to consolidate the cable industry in tier 2 and 3 cities. Rising programming costs are squeezing smaller players into the arms of larger operators, which in turn are seeking benefits from economies of scale. We are seeing evidence that smaller cable operators will either exit or merge with existing cable operators."

Added Yong: "Charter can gobble up assets at accretive prices given its sizeable tax basis."

Said ISI Media analyst Vijay Jayant. "As John Malone…has done in Europe through Liberty Global, Charter could become an industry consolidator in the U.S."

But UBS analyst John Hodulik was less bullish on suggestions that Charter could become a U.S. acquisition vehicle for Malone given that the investment deal for now limits his ability to boost his stake in Charter to around 40 percent, meaning Liberty Media won’t get control of the firm any time soon. "It would be difficult for Malone to get control of Charter given insider ownership of about 37 percent," he said in a report. "As such, we do not expect Malone to use Charter as a platform to consolidate the industry."

Hodulik instead sees Malone’s goal of acquiring a stake in Charter as a way to potentially benefit from a future sale of the cable firm. "We see Charter as an eventual consolidation candidate for a larger cable operator, such as Time Warner Cable," he said.


Twitter: @georgszalai



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