The cable industry is moving towards consolidation, driven by ongoing acquisitions made by large players. Recently, there have been rumors that Time Warner Cable (NYSE: TWC) is a potential target of Comcast (CMCSA -6.23%) and Charter Communications (CHTR -2.79%). Media guru John Malone, via Liberty Media, has also taken a 27% stake in Charter Communications with the intention to use the company as a consolidation vehicle. However, there is one company that has not been mentioned in the industry consolidation picture yet: Cablevision Systems (NYSE: CVC).
The bidding war for Time Warner Cable
Comcast is the No. 1 cable player in the U.S., serving around 22 million subscribers. Time Warner Cable ranks No. 2 with 11 million subscribers. Charter Communications stands in the No. 3 position with 4.2 million subscribers. Thus, if Comcast is able to acquire Time Warner Cable, the deal would create a cable empire with 33 million customers in the U.S., and the company could scale up its footprints in both the New York and Los Angeles markets.
Time Warner Cable is not only the target of Comcast, but also the potential target of Charter Communications. Recently, John Malone showed his intent by arranging around $25 billion in debt financing for the acquisition of Time Warner Cable. According to the Wall Street Journal (log-in required), this debt package could include nearly $90 per share in cash, while Time Warner Cable's shareholders could also receive Charter Communications shares as well.
Cablevision could also be a good acquisition target
Cablevision is the No. 5 player in the cable industry. With its Optimum brand, the company has around 3.2 million subscribers, most of which reside in the New York metropolitan area. The company has experienced sluggish operating performance along with declining adjusted operating cash flow. In the third quarter, cable-adjusted operating cash flow dropped by 2.9%, mainly due to a 9.7% increase in programming cost and a 2.5% rise in other operating expenses. Cablevision's high leverage ratio of 4.7 might also worry investors. However, this has improved significantly over the ratio of 5.2 in the second quarter.
Cablevision has been becoming more efficient, improving its Optimum experience with a combination of superior products and excellent customer service. The company has been trying to decrease the number of trouble calls and unnecessary truck rolls, and it has achieved some progress here. Year-to-date, Cablevision has managed to decrease total call volume by 8% while truck rolls following trouble calls dropped by 28% and repeat trouble calls declined by 40%. In addition, since summer the company has laid off around 400 employees to improve business efficiency. Cablevision CEO Gregg Seibert commented, "We are going to have efficiencies because we have made certain realignments at the corporate level and also out in the field."
In the current trend of industry consolidation, Cablevision seems to be a good acquisition target with its relatively cheap valuation. It is trading at $16.50 per share with a total market capitalization of $4.40 billion. The market values Cablevision at 7.8 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization, while Comcast and Time Warner Cable have higher EBITDA multiples at 8.1. I personally think that if the bid becomes official, Time Warner Cable's multiple will head higher, setting a new higher valuation for the cable industry.
My Foolish take
Despite its sluggish performance, Cablevision could deliver more value in the future due to its operating efficiency improvement and industry consolidation. With 3.2 million subscribers, Cablevision could be a good acquisition target for large players like Comcast and Charter Communications. Moreover, while waiting for a potential buyout offer investors can also get a nice dividend yield at 3.80%.
