Go big or go home – that’s how John Malone rolls. But even by his titanic standards his pursuit of Time Warner Cable is staggering and will ultimately prove too much to bite off. Three months ago the prodigal son of cable returned to his roots by acquiring – through his Liberty Media company – a 27 per cent stake in Charter Communications for $2.6bn. Charter is the fourth-largest US cable provider with 5m subscribers and an enterprise value of $25bn. By contrast, Time Warner Cable has 15m subscribers and an enterprise value of $55bn, which illustrates just how audacious Mr Malone’s play actually is.
But his bravado is understandable. He bought into Charter at $95.50 per share three months ago and it is already up a third since then. Even so, Mr Malone realises that Charter cannot be measured against the cable operators alone. Throw the satellite and phone companies into the competitive mix and Charter is merely a bit player in the business of pay TV and broadband internet. What is more, with the increasing leverage of the content providers (both the cable channels and local stations keep extracting increasingly hefty fees), distributors need to beef up in order to hold the line on programming costs. They also need size to extract the most benefit from high-speed internet, the cable industry’s real growth engine.
No one is a better financial engineer than Mr Malone, so perhaps the combined muscle of Liberty Media (enterprise value $26bn) and Charter could stretch to make the maths on a TWC bid work. But Time Warner Cable has been reportedly cool thus far, so turning to Cablevision, controlled by the Dolan family, is the next logical step. Combining with this New York-area company would create the clear number three in US cable. Synergies could come from boosting Cablevision’s operating margin of 28 per cent – 7 percentage points lower than Time Warner Cable’s and Charter’s. And with Cablevision’s enterprise value of $14bn, humility in the name of strategy should guide Mr Malone’s next move.