Thursday, January 25, 2018

Cable Mergers and Spinoffs - Bigger is Better?

Nearly 15 months have passed since AT&T and Time Warner announced their $109 billion-dollar merger agreement. For most of 2017, the companies were confident that their merger would pass regulatory review by the Department of Justice and by the FCC. As the first big to face scrutiny from the income Trump administration, the presumption was that regulators would take a pro-business, hands-off approach especially since the companies do not compete in the same markets and hence would not be constricting the competitive field.  The predicted completion date was “by the end of 2017.” The deadline has now passed.  The new target is “by mid-2018.” 

What’s the hold-up? In late November, the U.S. Department of Justice filed a legal case to block the proposed AT&T + Time Warner merger, apparently on the grounds that the size of the combined company will but smaller players at a competitive disadvantage. So, the logic is that bigger is better, and, as a corollary, smaller is weaker. For AT&T and Time Warner to get to that mid-2018 merger completion date will now require a legal victory in a U.S. District Court.

The official response from AT&T is this “(the) DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent. Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently” -  David R. McAtee II, Senior Executive Vice President and General Counsel, AT&T Inc. 

For network operators – bigger is better, especially with content

Since the time the proposed acquisition was announced in October 2016, AT&T has been arguing that the primary driver for the deal is to bring content and distribution under one roof. The merger will combine Time Warner's library of content and ability to create new premium content with AT&T's extensive customer relationships, world’s largest pay TV subscriber base and scale in TV, mobile and broadband distribution.

As a reminder, Time Warner, which was formed in 1990 through the merger of Time Inc. and Warner Communications, encompasses many premium media properties, including HBO, New Line Cinema, Turner Broadcasting System, The CW Television Network, Warner Bros., CNN, Cartoon Network, Boomerang, Adult Swim, DC Comics, Warner Bros. Animation, Castle Rock Entertainment, Cartoon Network Studios, Esporte Interativo, Hanna-Barbera Productions, Warner Bros. Interactive Entertainment. It also owns 10% of Hulu.

The basic idea driving the merger is for Time Warner to act as the content arm for AT&T, providing mobile and fixed broadband line subscribers with valuable material as part of a packaged service bundle. Consumers presumably would purchase an AT&T service bundle based on the perceived quality and value of the package rather than simply the lowest price for mobile connectivity. This will allow ARPU to rise and ensure a 'stickiness' factor that goes beyond the latest mobile handset deals, currently a leading cause for subscriber churn.

So, until we hear otherwise or until the courts rule that the merger is impermissible, the presumption is that “bigger is better” and that AT&T and Time Warner will continue to pursue their business combination.

A mobile + cable merger in Sweden

Earlier this week, another merger was proposed also on the premise that bigger is better. Tele2 and Com Hem agreed to a merger that will create the second largest mobile telephony and fixed broadband provider in Sweden (after Telia) and the market leader in digital TV. Com Hem’s shareholders will receive as merger consideration SEK 37.02 in cash plus 1.0374x new B shares in Tele2 for each share in Com Hem. This values the deal at about US$3.3 billion.

Com Hem operates a fiber-coax network serving approximately 1.5 million residential customers across Sweden. The company was established in 1983 and has approximately 1,200 employees. Its head office is in Stockholm.

Tele2, which was established in 1993 and is based in the Kista Science City, Stockholm, Sweden, operates an extensive mobile network across Sweden and has interests in The Netherlands, Lithuania, Latvia, Estonia, Kazakhstan, Croatia, and Germany.

The combined company will have a customer base of 3.9 million mobile customers, 0.8 million broadband customers, and 1.1 million digital TV customers in Sweden. Its 4G network will cover the entire country while its broadband network will cover almost 60 percent of Sweden’s households.
In presenting their merger to investors and to the press, Tele2 officials spoke of “evolving customer needs” and the appetite for digital content. As with the AT&T + Time Warner deal, there is an impetus to bring mobile, broadband and TV content under one roof.  

Some Service Providers are downsizing

One network operator moving in the opposite direction. Altice, the French operator led by business tycoon Patrick Drahi, who is known for ownership of his French cable operator Numericable.
Through a series of deals, in 2013 Drahi acquired SFR, France’s second largest mobile phone and internet provider from Vivendi. In late 2014, Altice acquired Virgin Mobile France for €325 million. The following year, Altice acquired Portugal Telecom and sold Cabovis√£o to Apax France. The hunger to grow bigger continued with a bid to acquire Bouygues Telecom, the third largest telecoms company in France. This merger was rejected by Bouygues Telecom. By then, Drahi had his sights on the U.S. cable market. In May 2015, Altice spent $9.1 billion to acquire a 70% controlling stake in Suddenlink Communications, which valued the seventh-largest U.S. cable company. This was soon followed in September 2015 with a $17.7 billion deal to acquire Cablevision, the dominant cable operator in the New York metropolitan area market. This deal was consummated in June 2016, making the new Altice USA into the #4 cable operator in the U.S. with more than 4.6 million Cablevision and Suddenlink customers across 20 states.

Many of the deals were accomplished with private equity debt. Now, 18 months after the transaction was completed, it appears that Altice has a case of indigestion. Perhaps bigger is not better, or maybe compelling content synergies have not been found across these diverse markets. Is there enough content synergy between France and New York to truly make one Altice brand?

This week, Altice N.V. announced a corporate restructuring centered on the separation of Altice USA from Altice Europe. The separation is to be effected by a spin-off of Altice NV’s 67.2% interest in Altice USA through a distribution in kind to Altice NV shareholders. Following the spinoff, the two companies will be led by separate management teams. Patrick Drahi, who will retain control of both companies, issued the following statement: “The separation will allow both Altice Europe and Altice USA to focus on their respective operations and execute against their strategies, deliver value for shareholders, and realize their full potential. Both operations will have the fundamental Altice Model at their heart through my close personal involvement as well as that of the historic founding team."



See also