'Darth Vader' vs the feds: Time Warner deal will test Charter's notorious backer

http://www.theguardian.com/media/2015/may/26/charter-time-warner-john-malone-acquisition-fcc

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If cable behemoth Charter Communications is going to succeed where Comcast has failed and buy Time Warner Cable, Charter’s prime backer, John Malone, may want to steer clear of threatening to kill regulators that stand in his way.

“All we need is a little help ... you know, shoot [Reid] Hundt!” Malone suggested to Al Gore in a 1994 interview in which he was less than enthusiastic about the then chairman of the Federal Communications Commission, the regulator now overseeing Charter’s $55bn bid for Time Warner. “Don’t let him do any more damage, know what I’m saying?” Malone warned.

Gore gave Malone the sobriquet “Darth Vader” based on his attitude toward regulators, a nickname that has stuck. On Wall Street they call him the “swamp alligator” for his ability to lie in wait before snapping up his prey – indeed, Charter was rumored as a suitor for Time Warner before Comcast emerged as the favorite.

Related: Charter Communications to acquire Time Warner Cable for $55.3bn

By buying Time Warner, the St Louis-based Fortune 500 company would expand to about 16.9 million US cable subscribers, giving the new entity, which would be called New Charter, more subscribers than all the other major private cable companies combined, save Comcast and its 22.4 million subscribers. In essence, the deal would turn the entire cable market into New Charter and Comcast. Satellite operators DirecTV and Dish telephone companies AT&T and FiOS would provide competing services, but the old-fashioned cable TV that accounts for more than half of US subscriptions would be split between just two companies.

The bid is not Malone’s first sally at Time Warner, nor his second or third. Charter bid progressively more for the company before walking away after its fourth bid of $132.50 per share in December of 2013 was soundly rebuffed. Now, at a share price of $195.71, the company is willing to take Charter as a suitor.

Cable TV is not a growing business. The number of cord-cutting consumers fed up with ballooning bills has risen 60% in five years, to 8.6m US homes at the end of 2014, according to data broker Experian. Entertainment conglomerates are publicly traded companies, too, and they will always demand a rate increase from their affiliates every few years; cable companies pass that cost on to consumers. Before long, observed BTIG analyst Rich Greenfield, this will probably happen directly to cable-hating Netflix and Hulu subscribers. “What the consumer actually wants is never really part of the decision set,” he wrote.

As margins contract, cable providers have less and less incentive to lay out big chunks of cash to offer broadband to low-population areas or refurbish aging network systems, and that, in turn, annoys customers, who turn to their competitors whenever possible. (Though it isn’t possible very often – cable operators who lay the original cable in the US have local monopolies they can control or sell, rather than being forced to lease their networks to competitors at cost, as is the case in the UK.)

However much Lord Vader wants the deal, though, it’s going to be a difficult road ahead for the proposed acquisition. Heedless of his own personal safety, FCC chairman Tom Wheeler said Tuesday that for Malone to demonstrate “an absence of harm” from a merger would be insufficient reason to approve the merger. “The commission will look to see how American consumers would benefit if the deal were to be approved,” he wrote.

That benefit may be hard to prove: in a survey by consumer experience consultants The Temkin Group, Time Warner’s internet service came in 270th out of 278 companies. Its cable service was the next item down, and just below that, Charter TV. The only glimmer of hope for the two was that Comcast’s TV and internet services were tied for dead last. (Just ask their customer Super Bitch, of the Illinois Super Bitches.)

Clearly, consumers aren’t happy with the service they’re getting, possibly because Time Warner has been vocal about not particularly caring what they think. In 2013, Rob Marcus told users to expect “fewer channels and features” for their dollar.

Marcus’s own dollar is relatively secure: though he didn’t benefit from the Comcast deal, which would have netted the executive $80m had it closed, he did manage to unload some $43.7m in stock last year, according to SEC filings, and will certainly benefit from the Charter transaction, should it go through.

Malone has put his considerable money where his mouth is: the Comcast deal eschewed the traditional “breakup fee” for failed mergers, so the larger company got away clean. But if Charter fails to acquire its competitor, it will owe $2bn to Time Warner.

The deal comes late in the 74-year-old investor’s career; it’s a potential watershed for the cable industry, where he has made his millions first as the head of AT&T and then as boss of Liberty, where he’s held stakes in a number of major media corporations. Even if the deal doesn’t go through, Liberty still owns fully 1% of the gigantic Time Warner Cable. Malone’s frenemy Rupert Murdoch made a similar gamble last year with Time Warner’s media assets (which jettisoned the cable division in 2009). That move ended in ignominious defeat for Murdoch.

Murdoch and Malone have fought and made up for decades; Malone at one point owned 32% of the non-voting shares in Murdoch’s News Corp. When he suddenly started converting them to voting shares, Murdoch parted with significant assets, including a controlling stake in DirecTV, to shake him off. Maybe Malone’s (presumptive) career capstone will prove better timed. Murdoch will be watching closely from the sidelines and wondering whom to root for.

As Malone (and Murdoch) would no doubt note, what’s old is new again. The deal is an interesting role reversal for Malone: after selling Tele-Communications International (which grew to the largest cable operator in the country – 13m subscribers – under his leadership) to AT&T, he presided over the spinoff craze of the early 2000’s, when Time Warner Cable split off from Time Warner Entertainment, DirecTV spun off from Hughes Space, and sundry other cable operators struck out on their own. Now, as the cord-cutting craze hems in profit-conscious cable operators unwilling to invest in slower-growing networks or refurbish their current systems, he’s watching the market try to contract. The question is whether or not the FCC will let Malone do the contracting.