Frank Hoover
December 25th, 2013
Time Warner Cable: An Epic War for the Last Mile
Overview
This paper is about transparency. I’m a technologist who spends his days building software, studying the economy and thinking about the future. On December 13th, 2013, I lost my job. It was my birthday and so I spent the next 9 days thinking about my life. On December 24th, 2013, I decided to bet my life savings of $1,100 on the US cable industry and hedge fund manager John Paulson of Paulson & Co. After reading hundreds of articles, analyzing charts and discussing the idea with others, I made a bet on Time Warner Cable options. Why? Because the original Cable Cowboy, John Malone is preparing a bid for TWC with Liberty and Charter with backing from Goldman Sachs. I believe this bid will be the first shot fired in a War for Airwaves. Comcast is interested, Cox is in the mix and a host of other big tech companies detailed below. The Feds have indicated they will not create high regulatory barriers for approval, so this looks like a recipe for fireworks and I’m about to explain why I think this.
Though under fire and losing customers, Time Warner Cable is a rare target at a rare time. It’s been more than 7 years since we saw a cable company of this size go on the block. This news is breaking over the holidays and not many are paying attention to the important facts of what will become one of the greatest battles in corporate history. The world’s tech titans will clash over this, fight for it and someone will win. I call it “Time Warner Cable: An Epic War for the Last Mile”.
The War
This is my prediction for what will be a high-intensity and expensive battle for the pipes. The tech titans of the world have more cash than they’ve ever had in history and all of them want your eyeballs. On January 1st, 2014, Rob Marcus will take over as CEO of Time Warner Cable and then it will begin. It’s a very “weird time” says BusinessWeek. My opinion, it signals that opening bids are due for the AUCTION. Rob Marcus, who has been in M&A for years, is our auctioneer and he will signal that TWC is now for sale. Marcus is also incentivized as he will receive a $50MM exit bonus for selling. How’s that for encouragement from the board? Another interesting fact, even though Time Warner Cable is losing subscribers, the company has quit fighting content pricing and are agreeing to pay higher rates to the likes of Viacom, CBS and others. That sounds like you plan on selling the company Mr. Marcus.
The Players
Below are all the people and companies who might have an interest in controlling the last mile to your home and they will be firing on all cylinders in this one. Once you own the last mile, you own the consumer until such time as a new technology disrupts your business. Time Warner and Charter among others have been building out their networks with fiber into buildings around the country so the asset is valuable and the consumer is even more valuable.
Time Warner Cable bowing out signals the decline of the old model for the cable industry because of competition, pricing increases and terrible business models. But the pipes are what everyone has always wanted and this is a gem. The pipes are gold folks.
Why would they do this? Let’s take a look at the players:
1.Ă‚ Apple: $140+ billion cash, $500 billion market cap, $53.666 billion free cash flow
The Big Cash Machine…bidders beware. Apple wants pipes for their TV system. They are also suing Time Warner for patents. Winning this let’s Apple take control of phones, music, cable, tablets, tv and more. Once combined, it will be hard to beat them with the full integration between those platforms. That’s why we can expect some serious bids. Apple winning may cause damage to almost all the hardware manufacturers in the US locking consumers to Apple.
2.Ă‚ Microsoft: $68.3 billion cash, $312 billion market cap
XBOX One.
3.Ă‚ Google: $30+ billion cash, $373 billion market cap
Sergey and Larry just bought Boston Robotics with plenty more cash to spend. So why not enhance the existing google fiber rollouts with the addition of the TWC network.
4.Ă‚ Cisco: $46.4 billion cash, $116 billion market cap
They control the switching and plumbing of the net. Why wouldn’t they want to own the TV?
5.Ă‚ Oracle: $33.7 billion cash, $169.51 billion market cap
Larry Ellison flies Russian Migs, wins America’s cup with high-tech sailboats and he has a corporation named Oracle. He should jump in this war and drive prices higher. In the end, his databases will power the storage of content, data and make more money.
6.Ă‚ Qualcomm: $28.4 billion, $124 billion market cap
They have chips and hardware for the industry so they might lose some business especially if Apple takes over.
7.Ă‚ America Movil (Carlos Slim):
He’s the richest man in the world and owns the largest Latin American wireless network. This would be a prime asset to have a controlling stake in the US cable market.
8.Ă‚ Warren Buffet: Berkshire Hathaway
He is the Oracle of Omaha. He’s got cash. $40+ billion. Warren makes great bets like Goldman Sachs at the bottom of the crash. Sit this one out Warren. The asset isn’t worth it. Buy the options though.
9.Ă‚ Intel: $8.5 billion cash, $127 billion market cap
Intel wins either way, but they’d also like to expand their brand to the TV. The pipes are right.
10.Ă‚ Amazon: $8 billion cash $185 billion market cap
Bezos has Amazon’s video system and tying it to the pipes would be awesome for him.
11.Ă‚ Walt Disney: $4 billion, $131 billion market cap
Disney has a partner in Apple as Steve Jobs was the largest shareholder from the Pixar buyout. I see them working together on this one.
12.Ă‚ Yahoo!: $41 billion market cap
CEO Marissa Mayer is an ex-Googler. Not core space for them but their content networks, search and finance sites are great. Partner up Marissa!
13.Ă‚ Verizon: $225 billion in assets, $140 billion market cap
They want the pipes so expect some action out of them.
14.Ă‚ AT&T: $5 billion cash, $185 billion market cap, $275 billion assets
See above.
15.Ă‚ Comcast: $11 billion cash, $134.27 billion market cap
See above
16.Ă‚ Michael Dell: billions, hardware manufacturing
Mike has a highly efficient company for making hardware devices. PCs are dead and entering cable might give him a boost to his hardware business by vertically integrating it. It also ensures we keep the pipes open and stop Apple from limiting innovation. Bring back the WinTel cartel and fight!
17.Ă‚ Liberty Media and Charter: $130+ / share ($62 billion)
John Malone, the original Cable Cowboy, is firing the First Shot. I think he should team up with the satellites to fight this one.
18.Ă‚ Cox Communications: Private, BBB+ rated bonds.
They want the pipes like everyone else.
19.Ă‚ Dish: $3 billion cash, $27 billion market cap
The dish is done. It’s bulky, slow and has so many issues. Dish can ensure survival if they get this deal.
20.Ă‚ DirecTV: $2 billion, $35.4 billion market cap Needs a partner
See my assessment from DISH.
21.Ă‚ GE: $77 billion cash, $281 billion market cap
Thomas Edison founded this company. They own NBC and other media properties. They are a powerhouse and they wants pipes.
22.Ă‚ News Corp: $10 billion market cap, $2 billion cash
Newspapers are in major decline and nothing will bring them back. Pipes could revitalize the business for Murdoch.
23.Ă‚ Viacom: $2.4 billion, $38 billion market cap.
Viacom must have been surprised when Time Warner just rolled in and shook hands. Signals that Time Warner knows they’re going to get some action.
24.Ă‚ Netflix
They have content flowing like House of Cards and a model that releases all episodes at once. That’s real innovation and players like Hulu, Wal-mart and others w/ digital video delivery systems may be involved.
25.Ă‚ Mark Cuban:
Mark is a guy who likes to rough up the business world, sports and other industries. Let’s go Mavs!
Top Shareholders
John Paulson, Paulson and Co. (4MM shares)
He is always ahead of the curve, killed it in 2007-2008 with default swaps and I believe he sees a battle coming. He loaded up back in September around the time the first articles hit the wire. He’s up 20% already so I think he’s going to make a killing once again.
Conclusion
My conclusion is that someone is going to win this deal and it will change the face of the industry, but before it does, its going to cost some serious cash. In the end, these are pipes and they deliver content. The questions these companies must answer are the following: What happens if I lose? How much are the pipes worth today and how much value do they bring to me in the future. Lastly, does owning the pipes give you control of the consumer if we have freedom of speech, expression and religion? Does it mean we are free to surf the web if one company controls it all? These are important questions that will be answered in the near future.
So Let the games begin!
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References:
Cox Bid:
TWC @ $170 bid
Buyout Buzz: Verizon or TWC???
http://investorplace.com/2013/12/verizon-vz-twc-cmcsa-chtr-catv-buyouts/
Apple TV Snubbed by TWC: Pay up AAPL, TWC wants that $180 / share
Warren Buffet:
Intel TVs
http://www.intel.com/content/www/us/en/smart-tv/tv-devices.html
This guy didn’t do his homework:
http://247wallst.com/media/2013/12/05/time-warner-cable-wants-150-to-160-in-buyout-maybe-too-much/
Regulators rolling over even after cable fees were hiked by triple digits over last few years.
Patent Trolling:
Apps for different companies, picking and choosing…
Patent Trolls YouTube:
http://www.youtube.com/watch?v=R3bPpyJxvY4
Apple’s 10% of Corporate Cash Hoard
http://www.geekwire.com/2013/apple-controls-10-percent-corporate-cash-microsoft-place/
TWC offering for Big Brother
http://online.wsj.com/news/articles/SB20001424052970203716204577018171500032472
Buffet cash:
Buyout is caused by Falling Subs. Reality: CABLE is DEAD
http://finance.yahoo.com/news/why-falling-subscribers-spark-buyout-212203986.html
Cash Money Media:
What a TWC Buyout Means for Cable?
http://www.marketplace.org/topics/business/what-time-warner-buyout-could-mean-cable-and-rest-us
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