Celebrations of the collapse of Comcast’s CMCSA +0.46% $45 billion takeover of Time Warner Cable TWC +2.85% may prove short-lived. Instead of a cable sector with lower debt loads and more cash available to bear the brunt of falling subscription prices or added capital investment, U.S. consumers are now likely to get their service from increasingly leveraged providers who may not have the financial wherewithal to handle the industry’s continued upheaval and its chronic spending needs.
Conventional wisdom since Comcast launched its merger effort for Time Warner Cable in early 2014 was that the nation’s largest cable provider was seeking to use consolidation as a means to throttle the broadband speeds of choice-constrained users, jack up prices, and strong arm content providers at the negotiating table. That narrative carried the day and it’s no surprise that Comcast abandoned its merger effort, amid objections from the Federal Communications Commission and Department of Justice.
However, the consolidation of the cable sector is also as much a financial story as it is one about industry organization and competitive behavior.
Time Warner Cable became a takeover target through the course of 2013 after a series of earnings disappointments that hammered its stock and left investors calling for change. At the same time, Charter Communications CHTR -1.11%, a hard-charging John Malone-controlled cable operator was looking to use spongy financing markets to opportunistically increase it scale and give new legs to a strong stock run since it emerged from bankruptcy in 2009.
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