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15 August 2017

A multiway cable/mobile mega-merger is needed to reshape US market

And so the M&A merry-go-round whirls even faster in the fairground of the US telecoms and media industry. The end result looks likely to be a realignment of the sector, with cable and mobile players forming alliances against the big two telcos. The question is, which cablecos, and which MNOs, will join forces?

French-based cable group Altice, which has already acquired Cablevision and the smaller SuddenLink, is now making a real power play and reportedly preparing a bid for Charter (which has itself swallowed up Time Warner Cable and BrightHouse). However, to afford a price which could reach $185bn, according to Wall Street analysts, Altice (with a market cap of about $23bn, and almost that amount in debt) is likely to need some supporting investors. That could bring Softbank’s Sprint into play, and finally achieve something that has, for years, been a logical necessity to enable a more competitive US market – a Sprint/cable tie-up.

In turn, that could put to rest (at least for now) some of the other deals which are reportedly being discussed in US boardrooms, such as a merger between Dish and Sprint, Comcast and Sprint, or T-Mobile USA and Sprint. The new power of Altice as a converged operator might ease the regulatory path should Verizon decide to play for Comcast in future (though Verizon is regarded as a converged operator, its wireline territories are very limited, though lucrative). And it also might drive Dish or Comcast more quickly into the arms of TMO. Of course, others could also bid for Charter – Verizon and Softbank both being in the frame.

This is not just about consolidation in a saturating market, one where the US’s famously high ARPUs are finally tumbling amid a return to unlimited mobile deals and rampant bundling. This is also about realigning the US market to reflect market realities. Consumers and emerging enterprise and IoT services will require dense mobile and wireline networks with high quality backhaul everywhere. The distinction between wireless and wireline is already blurring, and will do so more with 5G, and to enable new vertical market services such as smart factories. TMO is doing a good job of growing as a mobile-only player, and has been one catalyst for the current round of M&A talks, but it cannot survive long term on price disruption alone. Bundling is becoming critical, especially with Verizon readying a quad play offer. In a recent survey of over 1,000 postpaid wireless customers, analysts at Jefferies found 41% would be “very likely” to bundle wireless service into cable internet, TV and landline phone packages, while 29% were unsure.

Both TMO and Sprint need a strong wireline partner so they can expand in quad play bundles, densification, content and vertical markets. And the cablecos, if they are to challenge AT&T and Verizon in multiplay services for consumers and businesses, including smart cities, certainly need more control over the wireless experience than a simple MVNO deal, or a WiFi-first strategy, permits.

Altice’s ambitions may help realize this next stage of US convergence. Its first aim is clearly to bulk up by acquiring a third cableco (presumably optimistic about the new US administration’s reputation for being easygoing on mergers within a single sector). But to maximize the value of expanding its cable footprint and customer base, it needs to branch into new multiplay services, as it has in France, where it acquired cableco Numericable and the country’s second mobile operator, SFR. That means an alliance with Sprint (or TMO) would not only help it afford a bid for Charter and placate that firm’s major shareholder, Liberty Global and its chief John Malone, but would also give it a strategic partner in the mobile market.

Its hand may have been forced by Softbank CEO Masayoshi Son, who indicated, at the end of July, that he would make a direct bid for Charter. An initial offer was rejected by Charter, which professed itself to be wary of a big deal in the wireless business, because of its “many challenges”. The cablecos have generally been cautious about wireless, and with growth in other areas, they have had the luxury of being so. Comcast and Charter have MVNO deals with Verizon but have been slow to activate them, though the former has now unveiled Xfinity Mobile; the two cablecos recently entered into a cooperation agreement for wireless, which may see their cellular and CableWiFi efforts bulking up in 2018. But it is clear that they will need to have greater control and resources on the mobile side to continue to grow their business via multiplays, so the days of ‘wait and see’ should still be over, and Son will have nudged that process along with his suggestion that the cablecos do not hold all the cards – an MNO could still make the running.

His offer, then, probably concentrated Altice chairman Patrick Drahi’s mind on setting some M&A priorities and keeping control of the agenda. For Altice, it would be far better to have Sprint as a junior partner than an owner, given the MNO’s issues with technology and management strategy, even since the Softbank takeover. This is what has put the idea of a mega-alliance, effectively against AT&T and Verizon, into the minds of analysts and industry insiders.

Jonathan Chaplin of New Street Research wrote in a client note: “On the most positive view of synergies, we don’t think there is enough value for Malone and other Charter investors to accept a deal where they cede control, despite holding the majority of the pro forma equity, while taking on the risk associated with a deal.” In another note, he said: “We think the prospects of a transaction depend entirely on whether Altice can field an offer that would make sense for Malone … Altice would need to fund a significant portion of the offer to public shareholders in cash for it to be accretive to them. This would likely require them to bring in a partner. The most compelling would be a strategic partner like Softbank or Comcast.”

Softbank would bring two jewels to the deal – financing through its huge Vision Fund, and a possible network infrastructure deal with Sprint. That could revive bad memories of previous cableco/Sprint collaborations, such as the ill-fated Pivot venture of 2005-2008, but in reality, Sprint has several attractions for a cableco:
It is far more culturally open to wholesale and network hosting deals than TMO.
Its 4G network, despite many hiccups, is now developing quickly and it has plenty of capacity in its 2.5 GHz spectrum in particular.
Its growth is still slow so it needs partners more than TMO does at this time – it needs cable links to support its ambitious densification program and to allow it to offer new multiplay services.

All this would pave the way for a far deeper relationship than an MVNO deal, for Charter – despite the legal fall-out of cancelling the Verizon agreement and, more seriously, the Comcast wireless alliance.

Chaplin continued, saying that Sprint is an “interesting partner because of the complementarity of their 2.5GHz spectrum with cable’s infrastructure (the spectrum is very valuable; you need access to its fiber infrastructure to unlock its value).” His scenario: “Altice acquires Charter; SoftBank provides funding to help get the deal done, taking an equity stake in the combined company in the process, and; Sprint and the cable companies agree to a network sharing deal that would give both access to the other’s networks at compelling economics…The value creation opportunity should get everyone’s attention.”

Nor would such an alliance necessarily preclude the much-rumored merger between Sprint and TMO at some stage (again, regulators willing – this level of consolidation might trouble even the current Department of Justice and FCC). However, New Street thinks a Sprint/TMO merger would be more likely to be approved with a cable deal in tow – rather than just reducing the number of MNOs, usually a red flag for competition regulators, it would “establish cable as a permanent and well-positioned new entrant with sustainable economics”.

Charter’s deal with Comcast could be a sticking point. One solution would be for both cablecos to enter the network sharing deal with Sprint, reviving the old Pivot, WiMAX and SpectrumCo alliances (though hopefully with better management, more shared objectives and a happier outcome). That would save Charter having to pay a break-up fee if it turned its back on wireless cooperation with Comcast (the two cablecos are not competitive in cable, since they have different territories, and it is in their interest not to compete in wireless either, giving them a scale advantage).

There is a huge dose of speculation, and even wishful thinking, in all these analyses. Charter does not need to be acquired – it still needs to digest its two acquisitions and it has a credible go-it-alone strategy, especially following the Comcast wireless pact. However, all the speculation makes one thing very clear – to set up a competitive landscape in quad play and emerging vertical/IoT services, there need to be several strong wireless/wireline players, not just AT&T (and in one territory, Verizon). That makes tie-ups between cablecos and the two national mobile-only players almost certain, but financially and operationally, multi-way mega-deals may be a better way forward, involving two MNOS and two cablecos (and with Dish fitting in somewhere too, though it might get snapped up by Verizon while everyone else is looking the other way).

When Sprint, over a decade ago, tried multiple times to form sustainable long term alliances with the cablecos, it was hindered by poor technology decisions and conflicts of interest. But its instincts were very sound. It saw the potential for convergence to offset the growing power of Verizon and AT&T – which were being propelled, by a lax M&A regime, to near-duopoly status. Now the stage is set for a third, and possibly fourth, converged giant, which would revive Sprint’s fortunes and harness its huge spectrum assets effectively at last; while pushing Comcast and/or Charter to get serious about wireless, belatedly.

The other area in which Sprint was forward thinking back in 2005 was in focusing on wholesale opportunities. It was the first US MNO to get seriously into supporting MVNOs, in the late 1990s, and it has consistently worked on the idea of hosting third party networks (going well beyond MVNO arrangements) and, in its WiMAX days, providing a wholesale platform for smaller, specialized service providers. This idea, which was also promoted by LightSquared (now revived as Ligado), will be an essential aspect of the 5G landscape, in which many services and providers, optimized for vertical and IoT segments, will need to be supported with more than a standardized MVNO contract. Dish, Ligado (see below) and a Sprint/cable combination all have the chance to leap in this direction – and it is the one area where they can outdo Verizon and AT&T. This, in the medium term, would have a more dramatic effect on the US landscape than the wave of convergence geared to consumer multiplays.