What the Comcast-Time Warner Cable Deal Means for Liberty Media

The biggest news to rattle the financial markets this week happened late Wednesday when Comcast (NASDAQ: CMCSA  ) announced its intended acquisition of Time Warner Cable (NYSE: TWC  ) for $45 billion. The market reacted as expected -- sending the buyer's stock down and the to-be-acquired stock soaring upward. The news marks the first major move in a cable consolidation trend that Liberty Media (NASDAQ: LMCA  ) Chairman John Malone has been touting for months. The only problem is, Malone was left out in the cold on this one, and so were Liberty and Charter Communications (NASDAQ: CHTR  ) investors. Does this alter the course for Liberty and Charter, or is the Comcast-Time Warner Cable marriage just a hiccup in their overall plans?

Dear John
Throughout 2013 we heard about Malone's master plan for cable industry consolidation. Despite the somewhat ominous implications for consumers, the idea to strengthen the industry and increase pricing power against broadcasters and content owners makes sense. Cable's business model is under attack by streaming businesses, satellite companies, and traditional telecoms. Malone is correct that the industry requires substantial change in order to remain competitive in today's media landscape.

His plan included Charter Communications (which is 25% owned by Malone's Liberty Media holding company) making a bid for or teaming up with another large cable company -- namely Time Warner Cable. In the first few days of 2014, the company made just such an offer, which was immediately rejected. Time Warner Cable considered Charter's $132.50 per share bid to be outrageously low, citing $160 per share as more reasonable. Comcast's offer comes in pretty close at roughly $159 per share.

Previously, Charter and Malone had mentioned the possibility of teaming up with Comcast to sweeten the deal for Time Warner Cable. This week's move, however, saw no mention of Charter.

Out cold?
Charter's big push to become a formidable national cable player has been seriously set back (if regulators accept the proposed Comcast-Time Warner merger). Even though Comcast agreed to divest 3 million of Time Warner Cable's 11 million subscribers, the proposed juggernaut will still represent nearly 30% of the entire cable market.

Missing out on the opportunity to boost the cable business affects another Liberty property -- Sirius XM Radio. Recently, Liberty made an offer to buy the remaining portion of the streaming radio company that it doesn't own. Many thought the asset would be used as leverage for future purchases.

Does the Time Warner Cable fallout threaten Liberty's pursuit of Sirius?Probably not.

For one thing, we knew that Liberty intended to own Sirius outright before this cable business brouhaha got moving. The deal is appealing on its own -- it's a tax-free acquisition that, while not as tantalizing as a mega cable/radio/airwaves business, is still great for Liberty and its investors in the long run.

Charter can still grow its business as well, just not by the same magnitude. Time Warner Cable's precious New York City market will surely stay with the company, but other markets will have to be divested in order to gain regulatory approval. If the price is right, Charter can pick up these new markets to materially grow its subscriber count.

A win for Comcast
If this all gets by the guys in Washington, it will certainly be a win for the ever-growing Comcast. For Liberty and Charter, though, the situation is unfortunate but not damning. There are plenty of opportunities for the companies to grow in cable and beyond. Liberty, with its master level management team, remains a great long-term pick despite this week's activity.

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