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Cable Technology Feature Article

December 20, 2011

Cable TV M&A - Cash Flows Good, Valuations Not So Great but Excitement Looms

By Peter Bernstein, Senior Editor

At TMCnet one of our pleasures is being able to ask the experts in certain areas what they are seeing for their sectors. Thus, with cable TV merger and acquisition (M&A) activity having roared in Europe in 2011, but being relatively quiet in the U.S., it seemed a good time to ask Andrew Lucano and Stan Bloch at the law firm of Seyfarth Shaw, who to give us their views on what is going on it cable in terms of industry restructuring and what to look for in 2012.   

Bloch took an expansive view on the fact that as the year 2011 ends, what can be said about the U.S. cable market is that “cash flows are good but valuations have been disappointing, and this has been a modest year in terms of M&A.” He noted that, “Every five or ten years there is significant concern about the future of cable as technology and/or business conditions raise issues. Yet history says that this is and will continue to be a cash flow positive business characterized by a couple of consistent trends.” These were:

  • Valuations are situational.
  • There have been and will continue to be natural acquirers for smaller entities when they go to market.
  • We are years away from the industry being totally consolidated. However, looking back over the history of the cable industry regionalization and the desire and wherewithal of companies that like the business, know how to run it profitably  and have substantial resources has radically changed the franchise maps and the concentration of industry ownership.
  • Nobody can predict how in the near future people will view video, but at a minimum over a high-speed pipe will be the primary delivery vehicle and cable operators are well-positioned (albeit under-valued) to remain at the center of content delivery ecosystems.

Lucano pointed out that looking at valuations cuts two ways. He noted that, “One the one hand, having cash flow means that those looking to sell can wait out this period of economic uncertainty until valuations get better. One the other hand, this is obviously a good time for those with resources to investigate purchasing strategic assets inexpensively.”  

Bloch added that the marketplace for franchises continues to be dynamic, and this is an interesting time for people to be figuring out how and when to place their bets depending on what scenario management subscribes to on the future business models for content delivery. 

As he noted, “The  number of changes on programming sourcing, the aggressive nature of over the top (OTT) providers and the continued fragmentation of audiences, along with perception of customers’ willingness to absorb price increases, make all of this fascinating.” 

He added that in 2012, the firm is looking at the probability that as the economy shows signs of improvement, “People who have held back will come to market. Buyers willing to pay what sellers are looking for.”

In thinking about valuations, think about the following:

  • Verizon (News - Alert) rumored to be interested in purchasing NetFlix
  • There is intense speculation that under-valued Cablevision could be the target of a takeover by Timer-Warner which would have the effect of creating a virtual monopoly in cable for much of the New York City greater metropolitan area
  • The constant fighting between content providers of all stripes and cable systems’ unwillingness to over-spend for fear of customer churn is escalating around the U.S.
  • Satellite service providers, particularly Dish Networks, are ready to pounce.
  • Telecom service providers need to justify the continued deployment of their fiber networks and hence are putting significant pressure on margins in key markets.
  • While things like triple play, data services, hosted IP solutions, etc., position cable companies as pipe companies, loyalty beyond physical network attachment can be fleeting. Stanching the flow of value-added as consumer consumption habits switch from cable channels to things like YouTube, Hulu (News - Alert) and NetFlix is no small task.

In some eyes valuations may seem low, but as all of us who have ever owned a house know, some of us the hard way in the last few years, “situational” is a nice way of saying that your assets are worth only what someone is willing to pay you at the time you desire to sell.

As Lucano and Bloch rightly detailed, positive cash flow does create options. How, when and by whom they are exercised in 2012 will be something to watch. As Cox Cable’s sale of its wireless spectrum to Verizon on December 16 and Verizon’s December 2 deal to cross-sell the services of Spectrum (News - Alert) Co.’s owners (Comcast, Time-Warner and Bright House Networks) after paying them $3.6 billion for their spectrum prove, there are going to be some deals between entities that are surprising. 

At a high level when viewing all of the players in the converging communications industries, Bloch had the right take, indeed we are, “Many years away” from seeing what a consolidated industry looks like. As a result, and maybe driven more by manifest destiny and the urgency to move based on strategic needs than on concerns over current economics, M&A is going to be front center.   It is going to be a bumpy ride.

Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya, Alcatel-Lucent, Telcordia, HP, Siemens, Nortel (News - Alert), France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Jennifer Russell