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Comcast's TWC Buy Could Spark Pay TV Deal Frenzy

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While some express concern about regulatory hurdles, one observer says the combination of the two biggest cable operators would have "formidable scale to combat escalating programming pressures."

Comcast's $45 billion deal to acquire Time Warner Cable could cause ripple effects across the U.S. pay TV sector and lead to further consolidation, according to industry observers.

Analysts on Thursday suggested that satellite TV giants DirecTV and Dish Network could consider another attempt to combine following the unveiling of the proposed megadeal that would combine the two largest U.S. cable operators.

"The new super [pay TV operator] also dictates further consolidation and more deals," says Wunderlich Securities analyst Matthew Harrigan. He tells THR that "a roll-up of other players is inevitable [as companies] need national scale."

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"It definitely revitalizes and paves the way for a potential Dish-DirecTV deal," Macquarie Securities analyst Amy Yong tells THR. "They can now argue to the regulators that Comcast-Time Warner Cable [is] bigger, and enabling them to merge will help increase their competitive position."

Meanwhile, Charter Communications, in which John Malone's Liberty Media acquired a 27 percent stake last year, will likely look elsewhere for deals. Malone -- who used to run TCI, which was at one time the largest U.S. pay TV operator -- has urged the cable sector to consolidate amid rising programming costs.

In recent months, Charter stalked Time Warner Cable, which rejected its deal offers as too low, including a recent offer of $132.50 per share. On Tuesday, Charter even nominated an alternative slate of Time Warner Cable board members. It had also negotiated with Comcast about a joint deal for Time Warner Cable. 

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Analysts said Thursday that Charter will take a look at the cable systems that Comcast looks to sell off if the Time Warner Cable deal gets approved. It is believed to be targeting a divestiture of systems with about 3 million pay TV subscribers. Charter will likely also hope that regulators deny a Comcast-TWC deal.

The initial reaction was a stock drop "as investors have been pricing in a potential TWC-Charter transaction over the last few months," says Yong. "However, consolidation is still on the table and management could seek out other opportunities, including Cox, Suddenlink, etc., as well as potential divestments from Comcast-Time Warner Cable."

She tells THR that Charter's focus could now be on smaller cable systems. "They roll up cable systems in nonurban parts of the U.S. where there's little [Verizon] FiOS overlap," she said.

Charter CEO Tom Rutledge has said that the company is mostly focused on better executing and improving its current operations, meaning it would be disciplined on any M&A deal.

Cablevision Systems, controlled by the Dolan family, has long been seen as a valuable cable operator that could be of interest to big sector players, but the family has so far not shown much interest in selling.

Observers have seen Comcast and TWC as the likeliest buyers, given their ability to pay a premium and their East Coast presence. "The two most logical buyers for the asset will be preoccupied for the next 12 to 24 months," says Yong. "As such, we expect the M&A premium currently baked into [Cablevision] shares could come down somewhat."

Others said the bigger company may not be allowed to consider a takeover of Cablevision at a later time.  

Meanwhile, an entertainment banker said Thursday that he expects bankers in the pay TV space and telecom space to pitch other pay TV deals now. He wouldn't say whether he was planning to also recommend content company combinations in case pay TV distributors continue to get bigger.

Asked whether Hollywood companies faced pressure to consider acquisitions now, Harrigan told THR: "Content companies are OK." He cited the desirability of "having multiple content factories."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai