More than a year after it was first proposed, the $45 billion  merger between Comcast Corp. (Nasdaq: CMCSA) and Time Warner Cable, Inc. (NYSE: TWC) was canceled last month.

The deal would have been the answer to an aging cable communications industry, creating a giant with sufficient scale to withstand the slow decline of cable and satellite subscriptions. It turns out, the giant may have been too large for regulators to allow, and Comcast pulled its bid before Washington could kill it.

#-ad_banner-#But it won’t stop the wave of industry consolidation. That’s because of rising competition from firms like Netflix, Inc. (Nasdaq: NFLX) and others, which has led to a 13% drop in live television viewership over the past year, according to Nomura Research.  

Broadband Is The Future Of The Industry

Regulators made it no secret that control over the broadband market was a big factor in their expected disapproval of the proposed Comcast-TWC deal. Comcast served 21 million internet customers and TWC had 11.4 million customers at the end of the first quarter. The combined entity  would have controlled 55% of the domestic broadband market, along with 30% of the cable TV market.

(Though analysts had been comparing the merger with the acquisition of DirecTV (Nasdaq: DTV) by AT&T, Inc. (NYSE: T), the buyout of the satellite provider will not give AT&T any additional broadband share.)

It is broadband where cable companies want to go, as they need to retain control over content distribution. Putting overwhelming control in the hands of one player was too much for regulators.

To get a sense of the changing industry conditions, you only need to look to a key trade show. What was once known as “The Cable Show” is now called “The Internet & Television Expo.” Another sign of the times:  Comcast reported during its conference call that broadband subscribers now exceed cable subscribers for the first time ever.

One CEO Wants A Partnership Or Outright Sale

Besides control of broadband, buying TWC would have given Comcast access to customers in New York and Los Angeles, key markets that Comcast has yet to conquer. It turns out, the company may still be able to buy its entry into the New York market — at  a much lower price.

Talking at the Expo, Cablevision Systems Corp. (NYSE: CVC) CEO James Dolan proposed consolidation in specific markets like New York instead of mega-merger deals that have met regulatory scrutiny.

“I think consolidation of [the New York] Marketplace would provide a great deal of ingenuity, and much more access to resources for the customers, and lower prices,” Dolan said in an interview with The Wall Street Journal.   

Dolan has been quiet about exactly what he meant, whether it means a sale of the company or the acquisition of another rival.  With a market value of $7.5 billion, Cablevision would be a much smaller deal compared to other mega-mergers. The company has 2.7 million video customers in the New York Metro area, as well as broadband service through its Cablevision Lightpath service.

Lightpath holds a franchise from New York City granting it rights of way authority to telecom services throughout the five boroughs. The broadband provider has more than 7,300 buildings connected to its fiber network and generated $352 million in 2014 sales.

Cablevision would be an attractive target for either Time Warner Cable or Comcast. Comcast was willing to pay an enterprise value of three times sales for TWC in its $45.2 billion deal. Cablevision currently trades at an enterprise value of 2.24 times sales, a 25% discount to the deal valuation. Shares of Cablevision jumped as high as 7.8% on May 6 after Dolan’s comments, but have since given back all the gains.

Any deal would have to be agreed to by the Dolan family, which controls 70% of the voting power in the company, and ten of the 18 board seats. Comments by CEO Dolan may finally be an acknowledgement that the country’s fifth-largest cable company needs a strategic solution to survive the changing landscape. Shares are attractive on a valuation basis and a deal may already be in the works.

Risks To Consider: Competition is very strong in the cable television market, which may lead to sluggish growth without consolidation.

Action To Take –> Position in Cablevision shares ahead of talks between it and other industry players about a potential merger or partnerships

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