US cable television: how big is too big?

It is better to deal from strength than weakness; and often better still not to deal at all. Early last year, Time Warner Cable, hit by subscriber losses and under siege from a hostile bidder, signed a risky tie-up with Comcast. With that $45bn deal now scuttled by regulators, the operator (and its 11m television and 12m broadband subscribers) is back in play.

A year ago, Robert Marcus, TWC's new boss, rightly took heat for the $80m golden parachute that would have opened above him had the Comcast deal gone through. But while the deal was pending, he stabilised the business. TWC may have gone from desperate seller to kingmaker.

When TWC jumped into the arms of Comcast, it was running away from the clutches of Charter, its smaller rival controlled by John Malone, the cable tycoon. Charter had offered TWC $132.50 a share - $83 in cash and the rest in Charter stock. TWC was unimpressed by the stock component. It asked for $160, with $100 in cash and the stock portion to be guaranteed against big fluctuations. That counterproposal was made moot by the Comcast merger.

Today TWC shares trade at $158. As a multiple of forward earnings (before interest, taxes, depreciation and amortisation) its shares trade at a robust 8 times. Charter's offer last year was at around 7 times. There are ways to manipulate multiples with cost savings and tax benefits but the game of merger musical chairs has made the sector more pricey regardless.

The thinking a year ago was that, despite its size, TWC would have to sell itself. However, TWC has halted the fall in subscriber numbers (in the first quarter it added 30,000 video subscribers along with 315,000 internet users).

Today it could use that strength to be the buyer of smaller cable operators such as Bright House, which are too small to respond independently to the changes being brought to television consumption by internet video. The options are tantalising. Comcast's ambitions were slowed by its size, something TWC must consider as it weighs its options.

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