John Malone’s Liberty Media Corp (NASDAQ:LMCA) empire has been doing deals at a feverish pace lately, with a recent spinoff of its Starz programming network and the acquisition of a majority stake in Sirius XM Radio Inc (NASDAQ:SIRI). In its latest deal, the company’s founder returned to his roots with a $2.6 billion purchase of a major stake in regional cable provider Charter Communications, Inc. (NASDAQ:CHTR). So, should investors follow Mr. Malone into this cable giant?
Charter is the nation’s fourth largest cable operator, with four million subscribers in a hodgepodge of states that include Michigan, California, and Wisconsin. Since filing for Chapter 11 bankruptcy in 2009, the company has been controlled by three private equity firms, led by Apollo Management. Charter used the bankruptcy process to improve its highly-leveraged financial position and provide funding for its ongoing network upgrade activities.
In FY2012, Charter Communications, Inc. (NASDAQ:CHTR) produced marginally improved financial results, with increases in revenues and adjusted operating income of 4.2% and 0.7%, respectively, versus the prior year. The company’s sales benefited from a small increase in the total number of subscribers and a stable pricing environment for its products. While the number of cable subscribers fell 4%, due to competition from alternative programming choices, Charter offset those losses with increases in its internet and telephone segments.
Despite competition from online video networks and traditional telecommunications providers, Charter Communications, Inc. (NASDAQ:CHTR) has maintained its competitive position in its core markets. The company’s goal is to maximize the number of customers utilizing multiple services, as with its so-called triple-play value proposition, which includes cable, internet, and phone service. Charter Communications, Inc. (NASDAQ:CHTR) has been fairly successful at targeting these customers, with 65% of their subscribers currently opting for multiple services. Given the constantly rising cost of acquiring both programming content and subscribers, the company will increasingly be looking to upsell its existing customer base to generate future profit increases.
Despite a diminished role for cable companies in the current entertainment delivery ecosystem, Liberty obviously sees a solid potential return on its multi-billion purchase price. Liberty received a 27% stake in Charter Communications, Inc. (NASDAQ:CHTR) for its $2.6 billion investment, which valued the company at roughly an 8 EV/EBITDA multiple. The price was not overly expensive, given the large stake and a likely ability to control Charter’s future business and capital allocation decisions.