Charter May Eye Acquisitions After Liberty Investment, Analysts Say

Just as John Malone's Liberty Global has consolidated cable operators abroad, Charter could drive deals in the U.S., some industry observers suggest.

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. acquisitions vehicle in the vein of Malone's Liberty Global, which has been consolidating cable operators in such markets 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.

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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." As a big shareholder, Malone's Liberty will likely push for such consolidation, she argued. "If you take a look at what [Malone] did in Europe with Liberty Global and Virgin Media, he definitely has an appetite to consolidate the industry," Yong said.

Echoed 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."

Evercore Partners analyst Bryan Kraft made the same argument, while also emphasizing the standalone benefits of the Charter investment. "We think Liberty found Charter to be an attractive asset, while on price/valuation," he said. "We think Liberty is taking a longer term view based on a successful turnaround of the operations and improvement in the growth rate, a reduction in capital expenditures over time and the potential for Charter to gain scale through consolidation in what is still a somewhat fragmented cable industry."

He also pointed to Liberty Global as providing a likely playbook for Charter. "Scale is important in the cable business, something that is clearly recognized by Liberty," Kraft said. "John Malone has built the largest cable company in the world today - Liberty Global as measured by subscribers - and the largest in the U.S. - TCI - at the time he sold it to AT&T circa 1999."

But UBS analyst John Hodulik was less bullish on suggestions that Charter could become a U.S. acquisitions 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