Broadband Cable Association of Pennsylvania

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July 9, 2013

Cablevision investors see a brighter future in consolidation. But those with their sights set on a takeover may be turning a blind eye to major obstacles standing in the way. Liberty Media sparked the possibility of a new wave of cable consolidation when it said in March it would buy 27% of Charter Communications. With video growth slowing and programming costs skyrocketing, analysts speculated Liberty Chairman John Malone wanted to use Charter to spearhead a series of strategic deals. Cablevision shares have risen 34% since then on hopes it would be a target for Charter or for Time Warner Cable.

Even before Mr. Malone's reappearance on the cable scene, Time Warner Cable was considered to be eyeing Cablevision. The latter has three million video subscribers in a geographically concentrated area that fits inside Time Warner Cable's own New York coverage. But a deal hasn't materialized-and there is little reason to think it any more likely to get done now. Indeed, Time Warner Cable may no longer even be interested, considering Cablevision's serious hurdles to growth. Cablevision has the highest penetration of video, broadband and voice services across its coverage area among cable peers, leaving little room for expansion, according to Morgan Stanley. Cablevision also faces more intense competition from telecom peers, given a roughly 64% overlap with Verizon's FiOS offering. By comparison, Time Warner Cable and Charter have overlaps of just 14% and 4%, respectively, according to Moffett Research.

In response to the rise of FiOS, Cablevision spent much of 2012 investing in upgrading its broadband network, implementing a new interactive program guide and expanding Wi-Fi coverage in public places. As a result, free cash flow has fallen and leverage has risen: Net debt reached 5.6 times earnings before interest, taxes, depreciation and amortization at the end of 2012, according to FactSet. That compares with 4.8 times for Charter, which tends to have higher leverage than peers. Unlike Cablevision, however, Charter is growing, making Cablevision's debt level look particularly steep. Amid all this, analysts forecast Cablevision's Ebitda to fall 16% in 2013. That doesn't account for Cablevision's July 1 sale of its Bresnan unit to Charter. But even after factoring that in, Ebitda should fall by 10% as programming costs rise faster than Cablevision-wary of customers defecting to FiOS-can hike its own prices, according to Moffett. Moffett says Cablevision's monthly gross profit per video subscriber has fallen to $38, from $50 at the beginning of 2011.

Considering these structural challenges, any Cablevision buyer would likely demand a discount. But after the recent run-up in the stock, Cablevision's enterprise value, including net debt, is 9.1 times 2013 Ebitda. That compares with nine times for Charter and 7.1 times for Time Warner Cable. Operating and programming cost synergies would need to be substantial to justify such a premium. At the same time, the Dolan family, which owns 73% of Cablevision's voting shares, has historically been resistant to selling and is unlikely to part with the company at a discount. Investors looking to profit off industry consolidation should cut the cord on Cablevision. Wall Street Journal

Streaming video site Hulu attracted binding bids from suitors including satellite operator DirecTV, a partnership of AT&T Inc. and Chernin Group and the tandem of Guggenheim Digital Media and private-equity firm KKR, according to people familiar with the matter. Hulu's owners-Fox-parent 21st Century Fox, ABC-parent Walt Disney Co. and NBC-parent Comcast Corp. -had set a Friday deadline for bids. They will review their options and seek to work out a definitive agreement with one of the interested buyers in the next week or two, one of the people said. That will require completing plans to continue licensing their programming to the site. One of Hulu's greatest attractions is that it offers hit shows online the day after they air on TV.

Bidders could be interested in Hulu for different reasons. Pay TV operators could use Hulu as a platform to deliver programming to their subscribers online or on mobile devices. It also holds appeal as a stand-alone Internet TV service for people who don't subscribe to pay TV services. The amount of the bids wasn't clear. DirecTV submitted an earlier-round bid of more than $1 billion and is considered a leading contender. The satellite operator is interested in bundling Hulu with its pay TV packages while also offering a stand-alone option, people familiar with the matter say. Some provisions of the content agreements proposed by Hulu's current owners appear to provide advantages for a buyer like DirecTV that is a pay-TV operator with existing carriage agreements with broadcasters-so called "retransmission consent" pacts, one person familiar with the situation said.

AT&T's plans aren't clear, though analysts say Hulu content could be a major boost for the company's mobile video and streaming video services. Guggenheim Digital Media, which teamed up with KKR on its bid, is a unit of financial services firm Guggenheim Partners whose properties include the Hollywood Reporter and Billboard. It is run by Ross Levinsohn, a former interim chief executive at Yahoo Inc. who was deeply involved in Hulu in its early stages as president of Fox Interactive Media. Guggenheim Partners is advising Hulu's owners on the sale.

Hulu, which offers a free site supported by ads and a $7.99-per-month premium service offering greater access to shows, decided to put itself up for sale after its owners were struggling to settle on a direction for the site. Disney favored the ad-supported model that is familiar in the broadcast TV world, while 21st Century Fox wanted to focus on building the subscription service, which now has over four million subscribers. The ad-supported side of the business is profitable but isn't growing quickly, while the faster-growing premium business isn't profitable, a person familiar with the situation said. Overall, Hulu isn't profitable. The site's revenue last year was nearly $700 million.

Hulu, created in 2007, was the centerpiece of broadcasters' efforts to deliver TV programming online. But over time, the broadcasters wanted flexibility to pursue other opportunities to distribute their content digitally. They have sought out deals with Hulu rivals Netflix Inc. and Amazon.com Inc. and have invested in "TV Everywhere," which makes their programming available online and in mobile apps to pay TV subscribers. Wall Street Journal

Days before a Commonwealth Court begins to determine the merits of Pennsylvania's new, but un-implemented voter ID law, detractors are taking to the state Capitol to rally against a provision they call an obstruction to voting rights. Led by the Pennsylvania NAACP, the "Rally for Justice" rally will take place Thursday a 1 p.m. The trial begins Monday, July 15. Detractors of the law accuse the Republican-controlled state Legislature for trying to inhibit citizen's access to the polls. "It's backward assault on public education creates a school to prison pipeline that is definitely setting [Pennsylvania] decades back," state NAACP Religious Affairs Chairman Bishop A. E. Sullivan said in a news release. "Before we can expect to see broader based legislative support and court decisions to protect the gains we stand to lose, our voices must first be heard and presence felt." pennlive.com

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