Finance

Verizon Calling Charter: Anybody Home?

Deal chatter highlights shifts in once high-flying telecom industry 1/30/2017 8:00 AM Eastern

Charter Communications stock was sent on a roller coaster ride after reports that Verizon Communications made overtures about a possible combination that could transform the media and telecom landscape like no other in decades.

 

But just as quickly, investors began to shake the initial euphoria after skeptics aired their doubts, and the stocks lost some air. Charter stock, after gaining 7% ($22 per share) on Jan. 26 when news of Verizon’s interest first broke, fell as much as 5% ($16.19 per share) to $316.96 each in early trading Jan. 27.

 

The size and scope of a combined Verizon-Charter — Charter is the second largest cable operator with 17 million video customers — highlights the changes that the once high-flying telecom industry has undergone in the past few years.

 

THEY WITH THE MOST WIRES WIN

Telcos, which many feared would dominate cable with their state-of-the-art fiber optic networks and ability to withstand heavy startup losses, are seemingly being undone by the very business they thought would drive the final nail in their competition’s coffin.

 

The wireless business, despite its near ubiquity — Verizon has about 114 million wireless customers in the U.S. — is declining. And cable, long thought to be the dinosaur of the telecom world, is experiencing a resurgence as its broadband superiority drives subscriber gains.

 

Verizon’s business is declining 3.8% organically, while cable companies like Comcast are growing revenue at an 8% clip, according to MoffettNathanson principal and senior analyst Craig Moffett. What’s more, the next-generation wireless technology, 5G, is all about small cells that need to be connected to a reliable high-speed wire.

 

“And cable has the most wires,” Moffett wrote in a blog post last week. “In one of the great ironies of our sector, it may well be that the cable operators are better positioned for the next generation of wireless than are the wireless operators themselves.”

 

Verizon chairman and CEO Lowell McAdam informally approached one of Charter’s largest shareholders, Liberty Broadband CEO Greg Maffei, about a possible deal, according to reports. The interest comes on the heels of rival telco AT&T’s $108.7 billion bid for Time Warner Inc.

 

Though such a deal has many doubters, a Verizon-Charter combination could touch off a firestorm of merger activity in the sector that could render it unrecognizable.

 

While AT&T appears to be betting that the mobile business’ future is going to be hinged on diverse content, Verizon apparently believes that the company with the most and fattest connections wins the day. As Moffett noted last week, they can’t both be right.

 

A NEW MOBILE LANDSCAPE

Verizon isn’t alone in trying to figure out its place in the new mobile landscape. Cable operators are scrambling to add a wireless component to their service offerings — Comcast plans to launch a bundled mobile product in mid-2017, ironically through an earlier agreement with Verizon to piggyback on its network. Even Charter CEO Tom Rutledge, who has a similar Verizon agreement, has said the cable company has applied for experimental licenses to test 5G technology.

 

While anything can happen — and reports say McAdam has a list of 10 other things he can do besides buy Charter — Moffett and other analysts who follow the sector also point to the high cost of a deal. Most believe Charter would require a huge premium; many predict the MSO would not accept less than $450 to $550 per share in a buyout. And then there is the question of Verizon’s quarterly dividend commitment, which would balloon in any deal that would require issuing any substantial amount of stock.

 

Verizon may have some time to work out the kinks of a deal. The telco is likely a participant in ongoing federal wireless auctions that prohibit participants from talking to other companies during a government-imposed quiet period that is expected to end in March. That could give the telco just the time it needs to see whether its Charter trial balloon flies.

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