Now, Paulson sees another industry on the verge of consolidation: the cable business. Specifically, Paulson thinks that both Time Warner Cable Inc (NYSE:TWC) and Cablevision Systems Corporation (NYSE:CVC) could be acquired by Charter Communications, Inc. (NASDAQ:CHTR).
John Malone is the key
John Malone, the chairman of Liberty Media Corp (NASDAQ:LMCA), is the driving force behind any would-be consolidation. As I’ve written previously, Malone would like to see the industry reduce itself to fewer players, likely for the purpose of greater leverage when it comes to content cost negotiations.
But, will Malone be able to pull it off? Paulson seems to think so. At CNBC’s Delivering Alpha conference on Wednesday, he mentioned it as the next potential industry to consolidate.
And Paulson has put his money where his mouth is. As of his firm’s last filing, Paulson owned nearly 17 million shares of Cablevision Systems Corporation (NYSE:CVC) (up 37% from the prior filing). He owned no shares of Time Warner Cable Inc (NYSE:TWC), but interested investors should definitely check the next 13F for a stake in the cable provider.
Cablevision is a more likely target
Of course, it makes sense that Paulson owns a stake in Cablevision Systems Corporation (NYSE:CVC) and not Time Warner Cable Inc (NYSE:TWC). He argued that Cablevision Systems Corporation (NYSE:CVC) would be an easier takeover target due its smaller size. Cablevision Systems Corporation (NYSE:CVC) has a market cap of just over $5 billion, less than one-sixth of Time Warner’s $34 billion.
That poses a challenge for Charter Communications, Inc. (NASDAQ:CHTR), which has a market cap less than half of Time Warner Cable Inc (NYSE:TWC)’s. A deal could likely be done with enough leverage, but it would certainly be easier to buy the smaller Cablevision Systems Corporation (NYSE:CVC).
To be fair, there are still challenges with a Cablevision acquisition. Specifically, as Paulson noted, Cablevision is a family-owned business. Members of the Dolan family run and control the firm, if they don’t want to sell, a deal won’t get done.
Could Charter be acquired?
But, so far, all the reports have pointed to Time Warner as the company that’s about to get purchased. In fact, Bloomberg reported Friday that Charter Communications, Inc. (NASDAQ:CHTR) is working with Goldman Sachs to put together the financing for a deal.
But, could the purchase go the other way? As speculation of a forthcoming merger has intensified, the bonds of Time Warner Cable Inc (NYSE:TWC) have sold off. If Charter Communications, Inc. (NASDAQ:CHTR) purchased Time Warner, the resulting entity would be loaded with debt, perhaps as much as $60 billion.
Moody’s Senior VP Neil Begley has argued that Time Warner Cable could consider a defensive acquisition, itself acquiring Charter Communications, Inc. (NASDAQ:CHTR) to stave off a leveraged buyout.
Alternatively, Begley believes that Time Warner could purchase Cablevision or Cox Communications, becoming large enough in the process to prevent a Charter bid.
(Unfortunately for would-be investors, Cox Communications is privately held.)
Investing in the cable sector
Given all the chatter, it would be unusual if nothing takes place. At this point, it seems clear that, barring regulatory intervention, the cable industry is about to consolidate. As with the telecom sector over the last year, investors who take stakes ahead of a buyout could profit.
Based on reports over the last few weeks, Time Warner Cable Inc (NYSE:TWC) seems the most likely to be acquired. John Malone is moving aggressively to raise the financing needed for a bid, and that could benefit Time Warner shareholders.
However, Time Warner bondholders would lose out, as the subsequent company would be saddled with a tremendous amount of debt. To prevent that, Time Warner’s management could buy Charter Communications, Inc. (NASDAQ:CHTR) before Charter buys it.
Time Warner could also buy Cablevision, making itself too large to acquire. Or, if Malone can’t get the funds to buy Time Warner, Charter could buy Cablevision instead.
All three stocks have done great over the last month, rallying 7% (Charter), 14% (Time Warner), and 27% (Cablevision). But should the companies merge or be acquired, further upside is possible.
The article Hedge Fund Billionaire John Paulson Thinks These Companies Are Takeover Targets originally appeared on Fool.com is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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