Recently, U.S. cable companies have been making headlines for merger activities. Yesterday, The Wall Street Journal reported that leading American cable multi-service operator (MSO) Charter Communications, Inc. (CHTR - Analyst Report) is again exploring ways of buying Time Warner Cable Inc. (TWC - Analyst Report) and may escalate its bid to well above $170 a share. However, neither of the companies has confirmed the news.

In Jan 2014, Charter Communications had offered $132.50 per share of Time Warner Cable, including $83 in cash and $49.50 in Charter Communications stock. The total size of the deal was pegged at around $37.3 billion. However, the company lost to Comcast’s higher bid of $158.82 per Time Warner Cable share.

In the previous month, Comcast Corp. (CMCSA - Analyst Report) abandoned its 14-month long negotiation of the $45.2 billion takeover deal concerning Time Warner Cable owing to strong reservations expressed by the Federal Communications Commission (FCC) and the Department of Justice. In this context it is worth noting that Charter Communications had initially expressed its intention to acquire Time Warner Cable and had placed the bid for the same.

After the termination of the Comcast-Time Warner Cable deal, many cable executives opine that mergers between cable companies may not be possible in the future. However, Tom Wheeler, the U.S. Federal Communications Commission Chairman, stated that the agency is not against the merger of cable companies.

Another Buyer

Charter Communications is not the only company pursuing Time Warner Cable. Reportedly, French billionaire Patrick Drahi’s Altice SA (ATC.AS) has also expressed interest in taking over Time Warner Cable. Altice’s keenness in taking over U.S cable companies clearly hints at the European company’s interest in cross-border expansion and intention to create a strong foothold in the cable industry.

Who Will Win the Race?

In the event of the merger materializing, the combined Charter Communications-Time Warner Cable entity will command about 15 million video customers and 17 million high-speed broadband (Internet) subscribers.

According to research firm MoffettNathanson LLC, the combined Charter Communications-Time Warner Cable entity would cover more than 20% of the U.S broadband market, which is well below the FCC’s 30% market share benchmark. The joint unit will also be the third largest pay-TV operator in the U.S. after Comcast and DIRECTV (DTV - Analyst Report), which is also awaiting a regulatory approval for its acquisition by AT&T Inc. (T - Analyst Report).

On the other hand, Altice is new to the U.S market and has already agreed to purchase 70% of U.S cable company Suddenlink Communications for $9.1 billion. Following this, Suddenlink and Time Warner Cable would likely control less than 15% of the broadband market.

Over the last four years, the FCC has imposed stringent laws to exercise a check on the formation of monopolistic power within the industry (telecom and pay-TV). We believe Altice enjoys a slight advantage over Charter Communications as the merged unit of Altice and Charter Communications will be in command of less than 15% of the broadband market whereas the joint Charter Communications-Time Warner Cable entity would control more than 20%.

Bottom Line

In spite of FCC’s strict vigil, we believe that the U.S. telecom industry is likely to witness more mergers and acquisitions going forward. The U.S. pay-TV and high-speed data markets are intensely competitive. Success in these businesses largely depends on technical superiority, quality of services and scalability. This will compel small players to merge with larger peers.