Monday, July 15, 2024

America’s ‘cable cowboy’ lost out in infrastructure boom

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For the octogenarian billionaire “cable cowboy” John Malone, this is not the rodeo he expected. Malone’s Liberty Media bought around a quarter of Charter Communications 11 years ago. The US regional cable television operator was fresh out of bankruptcy, with shares trading at about $100 each.

By mid-2021 Charter’s stock price had hit more than $800, with more than 30mn customers spread across America. Even in an era of cable television cord-cutting, the company had benefited from an explosion in broadband internet service. It had also relied on debt and blockbuster M&A to underpin what it described as a “leveraged equity strategy” to further turbocharge its stock.

But since that peak just over two years ago, Charter shares have fallen to around $270. Its market capitalisation is now just $40bn, against almost $100bn of total debt. Leverage works both ways as broadband penetration has suddenly plateaued and increasing customer prices is not so easy any more. 

Charter is far better off than telco peers including Dish Network and Altice USA, whose debt problems are far more acute. But cable, broadband and wireless players are all running up against market saturation after collectively spending trillions on expensive infrastructure buildouts.

In the fourth quarter of 2021, Charter added 172,000 residential customers to its broadband service. By the fourth quarter of 2023, residential broadband customers fell by 62,000. Revenue for each of these customers had inched up from $114 per month to only $119. Annual free cash flow between the two years fell from about $9bn to under $4bn. 

Column chart of 000s of subscriber additions  showing Charter's broadband subscriber additions have cooled since the pandemic

Charter’s leverage ratio — total debt to ebitda — has jumped to 4.4 times. Capital expenditures have soared to about $12bn annually as the company now offers cellular phone service that competes with the likes of AT&T and Verizon.

A federal programme that subsidises internet subscriptions for low-income Americans is about to lose funding with little hope of renewal, dealing another immediate blow.

The overarching theme is that low interest rates through the 2010s subsidised a massive investment in media and telecoms infrastructure. The result is fast internet, clear mobile phone calls and wide-ranging content available on demand across any device.

Consumers have been the big winners, notwithstanding their complaints about creeping unaffordability. John Malone understood the direction of these forces, making big bets at the likes of Warner Brothers Discovery in addition to Charter. 

Wrangling these products into business models that produce durable profits, however, has proved much harder.

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