NEW YORK (The Deal) -- The sales of Time Warner Cable (TWC) and DirecTV Group (DTV) to Charter Communications (CHTR - Get Report) and AT&T (T - Get Report), respectively, would remove two high-profile pay-TV stocks from the market.
A couple of new cable securities debuted this month, however, with Graham Holdings' (GHC - Get Report) spin-off Cable One (CABO - Get Report) and Liberty Global's (LBTYA) creation of tracking stock, dubbed LiLAC (LILA - Get Report), to represent its growing portfolio in the Caribbean and Latin America.
Although those new entrants are niche players in Latin America and the United States, they have ties to formidable institutions.
Cable One is the latest asset that the Graham family is divesting since selling the Washington Post to Jeff Bezos for $250 million last year. Liberty Global is John Malone's international cable outfit, and LiLAC represents his forays into Latin America.
"It's an interesting time to test multiples in the marketplace right?" asked Amy Yong of Macquarie Capital, noting that buyout multiples have been at the high range of acquisition payouts over the past six years.
Liberty Global-backed Charter Communications is buying Time Warner Cable for $79 billion, including debt, which comes to 9 times projected 2015 earnings before interest, taxes, depreciation and amortization. Charter Communications is also picking up Bright House Networks for $10.4 billion or 8 times EBITDA.
Atlantic Broadband Group, owned by Canadian cable operator Cogeco Cable is paying Harron Communications $200 million for MetroCast Communications of Connecticut, which Yong puts at 9.5 times EBITDA.
Graham Holdings officially divested Cable One on July 1. The company is the 10th-largest U.S. cable company with $815 million in 2014 sales.
Although it operates in mostly rural areas in 19 states, the bulk of its systems are in Arizona, Idaho, Mississippi, Oklahoma and Texas. Bright House Networks president Nomi Bergman sits on the company's board.
Shares of Cable One debuted at $450.48 on July 1, and on Tuesday dropped 33 cents, or less than 0.1%, to $395.42.
Charter Communications, Cogeco's Atlantic Broadband or Altice, the Luxembourg communications group that is buying Suddenlink Communications for $9.1 billion, could take interest in Cable One, Yong said.
"It's certainly become somewhat of a land grab if you're interested in gaining scale in cable," she said.
Charter Communications declined to comment.
Representatives of Atlantic Broadband and Altice couldn't be reached.
Kevin Coyle, Cable One's chief financial officer, said that M&A is a goal of the company.
Cable One has leverage of about 1.8 times EBITDA and aims to boost debt to about 3 times EBITDA, with acquisitions being one of the uses of leverage.
The company isn't aware of any major cable systems on the market at the moment but would consider acquisitions if they fit Cable One's market profile. The company began to focus on rural areas and smaller markets, rather than more competitive urban markets, in the 1990s.
Cable One said that less than 1% of its customers' homes have direct access to fiber from a rival company and that it has no competition from Verizon Communications' (VZ - Get Report) FiOS pay-TV and fiber broadband service
"Certainly, lower FiOS overlap, a lower-competition footprint, a greater focus on broadband make the asset pretty attractive," Yong said.
The spin-off from Graham Holdings has been the main focus for the company, Coyle said.
"There is a lot of consolidation activity in the industry; we have not had any discussions with anybody," he said.
Taxes would be a consideration in any sale talks. A change of control could jeopardize the tax-free status of the Cable One spin-off.
Cable One wouldn't imperil the benefits from a spin-off as long as the spin-off and a potential sale weren't part of a "plan," tax analyst Bob Willens of Robert Willens LLC wrote in an email.
"The fact that a sale is 'expected' or 'contemplated' does not, by itself, make it part of the plan which includes the spin-off," he wrote. "In fact, by definition, the sale and spin-off can be part of a plan only if there was an agreement, understanding, arrangement or substantial negotiations regarding the acquisition (or a similar acquisition) at some time during the two-year period ending on the date (July 1) of the spin-off."
Tax-free divestitures often include an indemnity agreement that blocks a sale for two years, to protect the tax benefits.
There are notable examples of companies that were sold soon after spin-offs, Willens wrote.
Motorola Solutions (MSI - Get Report) spun off Motorola Mobility Holdings in 2011, and Google (GOOGL - Get Report) agreed to buy the company later that year. SunCoke Energy (SXC - Get Report) spun off Sunoco in early 2012, and Energy Transfer Partners (ETP) agreed to buy the company months later.
Meanwhile, Liberty Global's Latin American business is more likely an acquirer than a seller, at least now.
"The fact that it's been structured as a tracking stock lends itself more to consolidating the market rather than getting bought out," Yong said.
If Liberty Global fully broke off LiLAC it could facilitate a sale.
Liberty Global's Caribbean and Latin American unit generates $1.2 billion in annual sales from VRT, the top cable operator in Chile, and Liberty Cablevision, the dominant cable operator in Puerto Rico.
Liberty Cablevision closed the $272.5 million roll-up of Puerto Rican Choice Cable TV with private-equity firm Searchlight Capital Partners in June. Liberty Global has provided the LiLAC group with $100 million to fund operating costs and acquisitions.
LIBERTY GLOBAL CHAIRMAN JOHN MALONE
Liberty Global Chairman John Malone has other holdings in the region. The Englewood, Colo., media titan holds a significant position in U.K. operator Cable & Wireless Communications, which has operations in the Caribbean and Central America, among other markets.
A Liberty Global spokeswoman couldn't be reached Tuesday.
The history of Malone's media holdings is full of tracking stocks, spin-offs and asset swaps.
The Caribbean and Latin America is the latest arena. If past deals are a guide, Liberty Global's deal-making in the region isn't complete.
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