Cable System M&A Not Seen Slowing in '17
Pay-TV industry insiders and watchers tell us they expect 2017 to be a strong year for small and midsized cable deals, particularly because of what's expected to be a more favorable environment under a GOP-controlled White House and Congress. But it's still unclear where the Trump administration will stand on media consolidation, given mixed signals from President Donald Trump, said MCTV President Robert Gessner. FCC Chairman Ajit Pai would seemingly be more open to media deals, but it's conceivable there could be contrary pressure from the White House, Gessner said.
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The FCC and White House change in administration "gives everybody some measure of comfort about the future -- even those of us who aren't in the market to be acquired," Gessner said. He said the expectation of a less-onerous regulatory environment means the possibility of an increased perception of value of multichannel video programming distributor operations. There's an MVPD industry perception the administration and agencies will be more receptive to large transactions and that certain large deals that would have been off the table under a Hillary Clinton administration might be back on the table for consideration, said one lawyer with MVPD clients and deal experience.
Trump administration plans for a lower tax rate and for repatriation of cash held overseas should lead to a busy year for mergers and acquisitions overall, S&P Global Ratings said last week. But it also said even “a holistically less-stringent regulatory backdrop” still leaves antitrust enforcement as a likely hurdle to specific large transactions, citing a federal judge last month upholding a DOJ lawsuit seeking to block a combination of health insurers Aetna and Humana.
There likely aren't too many more deals to be done among major MVPDs because so few are left, said Howard Homonoff, MediaLink senior vice president. He said it's likely major MVPDs could be waiting for some midsize operators to become more attractive takeover targets as they themselves buy up small operators. Small and midsized cable deals already announced this year -- like Mediacom's buy of Illinois' TV Cable of Andalusia, Wave's buy of Cascade Networks, and Cable One's announced plans to buy NewWave -- all seemingly portend continuing M&A, Gessner said. He said the Cable One deal could be that company bulking up for a sale itself.
The number of residential cable companies in Wave's footprint available for acquisition is declining, but "there are still some," said Wave CEO Steve Weed. Nationwide, thousands of such operators remain. He said those small indie MVPDs will continue to be motivated to sell by valuations being up and the difficulty of scaling up a big Ethernet communications network. Weed also said Wave's M&A activity in recent years has focused on commercial fiber companies, and consolidation in that industry "is still fairly early."
The business issues driving M&A are seen as intensifying for some segments of the pay-TV universe. MVPDs are in "an increasingly difficult environment," with traditional competition among cable, satellite and telco operators intensifying due to the rise of over-the-top competition, Homonoff said. Some consolidation could take place among content companies, he said, saying Scripps Network Interactive and Discovery Communications are often subject of speculation as takeover targets. Homonoff said there are some industry expectations tech companies such as Google, Apple or Facebook could try to move into the content business, but that likely will be further off than 2017. If Amazon launches an OTT live linear service, as was speculated, that could make buying a studio more of a priority for the company, he said.
The rise of OTT players is going to drive yet more consolidation among traditional MVPDs and between MVPDs and content companies, said Andre James, head of Bain & Co.'s Americas media practice. The need for leverage and cost benefits drives distribution- and content-centric deals, but vertical integration of content companies and MVPDs is guided more about access to distributors' customer data for advertising purposes, James said. He said programmers are interested in such deals to use the data for better content investment decisions and better compete with Netflix, which is seen as using its content metadata to enjoy a series renewal rate more than twice that of traditional networks. But other major MVPD/content deals are likely further in the future than later this year, James said, saying if AT&T's bid for Time Warner doesn't get regulatory approval, that could slow the process.
Not everyone agrees on the future of MVPD/content deals. Not many major, vertically integrated content companies exist, Homonoff said. He also said there's "a more tried and true formula" for MVPDs buying MVPDs in terms of how to save money and synergies, thus making the business case for an MVPD/programmer more difficult: "It's a harder path to lay out and say 'absolutely, this is what will result.' ”
Experts also said they see the eventuality of M&A among OTT operators -- but not soon. Until the OTT market matures, "I don't think we are there yet," Homonoff said.