Liberty Media Corp (NASDAQ:LMCA) is also getting active in the space, taking a 27% stake in Charter. Charter is the fourth-largest U.S. cable operator, serving more than 4 million customers across 25 states. Liberty Media Corp (NASDAQ:LMCA) chairman and famed media investor, John Malone, has hinted at the fact that cable may have a counter attack to Netflix, Inc. (NASDAQ:NFLX). At Liberty’s recent shareholder meeting, Malone noted that Netflix, Inc. (NASDAQ:NFLX) has done a wonderful job, but he believes that cable operators will be able to offer “various tiers of connectivity,” including built-in video offerings or bundles.
Charter expects its triple-play bundle offering to help drive subscriber growth going forward. Charter is also buying up Cablevision Systems Corporation (NYSE:CVC)’s Optimum West, which should help bolster Charter’s network.
Cablevision is the fifth-largest U.S. cable operator, with nearly 3.2 million subscribers in the New York City area and several Western states. One of the big headwinds for Cablevision could be the recent deal between Charter and Liberty Media Corp (NASDAQ:LMCA), which will put pressure on Cablevision Systems Corporation (NYSE:CVC) to unlock shareholder value. But that might not be so easy. The company has cash of just over $580 million, compared to debt of over $10 billion.
As part of this, Cablevision is looking to reduce debt by using proceeds form the $1.6 billion sale of Optimum West to Charter and $525 million in litigation proceeds. I believe the best case scenario for investors is a sell-off of the company; Citi tends to agree and believes the stock will be sold in the next 18 months.
Don’t be fooled
Investing in stocks purely for the M&A speculation is never a good investment strategy. That’s why I like to look for solid business companies with solid business models as the first catalyst for growth, with M&A being a secondary factor.
What I believe to be one of the best players in the space is Time Warner Cable Inc (NYSE:TWC). Although it’s unlikely that the company will be acquired, it could be a merger candidate or go on the acquisition offensive to boost its portfolio. Analysts expect Time Warner Cable Inc (NYSE:TWC) to grow EPS at an annualized 12% over the next five years, putting its PEG ratio at 1.3, whereas Cablevision Systems Corporation (NYSE:CVC)’s is at 7.8% and Charter’s is at only 3%.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article How Cable Consolidation Can Enrich Your Portfolio originally appeared on Fool.com.
Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
