The cable industry appears to be ripe for consolidation, so what are some of the best ways to play mergers and acquisitions? Time Warner Cable was up nearly 10% last week and Cablevision Systems spiked 3.5% on M&A speculation. The interest in cable companies also comes after the news that Gannett announced plans to snatch up Dallas-based media company Belo; Gannett was up some 30% on the news, and Belo popped 28%.
Media General also agreed to buy New Young Broadcasting last week. Notable media analyst Tracy Young with Evercore Partners noted that "consolidation continues in the industry…at the end of the day there’ll be a handful of players.”
Other news in the industry includes the fact that Charter Communications could be looking to make a key acquisition. CNBC even reported that Time Warner might be looking to merge with Charter. The influx of streaming content from the likes of Netflix and Hulu, as well as HBO Go, has led to the need for conventional cable industry consolidation.
I think the consolidation is a welcomed catalyst for the industry. The merger and arbitrage market should remain robust going forward thanks to the loosening of the credit markets.
While I think one of the logical steps for both Time Warner and Cablevision is for the two to merge, that could be easier said than done. With some $3.3 billion in cash, it would look as if Time Warner could make an acquisition play for Cablevision, which has a market cap of $4 billion. However, all of these major cable operators carry sizable debt loads. Accounting for Cablevision's debt and low cash, the enterprise value is upwards of $13.7 billion. A price tag that not even giant Comcast could cover with cash, having only about $4.7 billion in cash. But it makes more sense for Time Warner and Cablevision to band together via a merger to better combat Comcast and Charter.
Time Warner is expected to continue goring revenue nicely over the interim, with 5.5% growth in 2013, due to gains in primary service units thanks to bundled high-speed data services.
Time Warner is also planning to launch its TWC TV app on Samsung Smart TVs during the summer, which will allow customers to stream content directly to their TVs, avoiding he need for a cable box.
Liberty Media is also getting active in the space, taking a 27% stake in Charter. Charter is the fourth-largest U.S. cable operator, serving more than 4 million customers across 25 states. Liberty Media chairman and famed media investor, John Malone, has hinted at the fact that cable may have a counter attack to Netflix. At Liberty's recent shareholder meeting, Malone noted that Netflix has done a wonderful job, but he believes that cable operators will be able to offer "various tiers of connectivity," including built-in video offerings or bundles.
Charter expects its triple-play bundle offering to help drive subscriber growth going forward. Charter is also buying up Cablevision's Optimum West, which should help bolster Charter's network.
Cablevision is the fifth-largest U.S. cable operator, with nearly 3.2 million subscribers in the New York City area and several Western states. One of the big headwinds for Cablevision could be the recent deal between Charter and Liberty Media, which will put pressure on Cablevision to unlock shareholder value. But that might not be so easy. The company has cash of just over $580 million, compared to debt of over $10 billion.
As part of this, Cablevision is looking to reduce debt by using proceeds form the $1.6 billion sale of Optimum West to Charter and $525 million in litigation proceeds. I believe the best case scenario for investors is a sell-off of the company; Citi tends to agree and believes the stock will be sold in the next 18 months.
Don't be fooled
Investing in stocks purely for the M&A speculation is never a good investment strategy. That's why I like to look for solid business companies with solid business models as the first catalyst for growth, with M&A being a secondary factor.
What I believe to be one of the best players in the space is Time Warner. Although it's unlikely that the company will be acquired, it could be a merger candidate or go on the acquisition offensive to boost its portfolio. Analysts expect Time Warner to grow EPS at an annualized 12% over the next five years, putting its PEG ratio at 1.3, whereas Cablevision's is at 7.8% and Charter's is at only 3%.
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