This week brought an exciting time in the cable business. One time star but currently bankrupt Adelphia was bought out by cable titan Time Warner and Comcast. The deal adds 1.8M subs to Comcast and 4M to TW. In addition, both swapped out systems to get better economies of scale (known as clustering in the cable world) and Comcast got a nice chunk of change for its former 21% stake in TW.
The deal touched off a debate as to what will happen next (regarding consolidation) in the cable world. The first name that popped up was Charter Communications (also known as Allen's Folly as it is captained by former Microsoft geek Paul Allen). Charter is logical because it is currently trading at only $1.45 a share and it has over 5M subs (ranking it the fourth largest cable co. behind Comcast, TW and privately held Cox Communications). However, The Hawk will show you just why Charter will be left at the alter.
1. $17Bilion in debt: Yes that's billion with a "b" and that number is not in pesos. Charter's debt is so high that some central African governments would feel sorry for them. The debt comes from Charter's deal daze of the late 90's where they overpaid for several cable systems and slammed them together to make what is today's Charter. Even 5M subs is not worth it for $17B .
2. Lousy systems: Yes Charter has tried to follow the cable model of "clustering" but they have bad clusters. The firm has several clusters on the outskirts of large metro areas (Seattle, Minneapolis-St. Paul and even Los Angeles) but their particular systems do not serve what we ID as high paying customers. Their best system is Saint Louis and why I love the Arch in Springtime, it is not enough to anchor a sale of the whole shootin' match.
3. Lag in roll-out of new services: Although they are run by a guy who prides himself in creating a Wired World, Charter is way behind in rolling out advanced services (HD, DVR, OnDemand, telephony and interactivity). The reason being is because they overspent so much for bad systems in bad areas they have not kicked out enough cash to upgrade their systems. This has led them to raise prices which has in turn led to massive customer defection to satellite.
Hawk's View: The way I see it is Paul Allen has to find a way to take this joint private. At the same time he needs to reach deeper into his velcro wallet and make a run at buying another cable co that has some systems that will give him bigger clusters (potentially Brighthouse in Florida or maybe Mediacom). Yes that will cost him a fortune but he is not check to check. A partnership with KKR to take Charter private and make a run at another cable co would be risky but it's his best option with the current hand he has dealt himself.
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