A $300 Billion Media Giant: Verizon Said To Be Exploring Charter Combination

While the fate of the Time Warner-ATT merger still remains up in the air, with Trump's campaign threat he would not allow the combination still a lingering concern, moments ago the WSJ reported that in what could be the next mega telecom-cable merger, $200 billion Verizon is exploring a combination with cable company Charter Communications, whose market cap clocks in at over $100 billion as of this morning.

The reason for the proposed deal is that both Verizon and Charter face challenges to their core businesses. Growth in the U.S. wireless market has slowed and pricing pressure has chipped away at profits. Furthermore, the cable-TV business is threatened by cord-cutters and over-the-top video services.

The WSJ cautions that efforts are preliminary and may not result in a deal and CNBC's David Faber has poured some cold water on the speculation, however, noting that it is "very unclear" if there are actual talks going on especially since the resulting outcome would be a "very big company." He is correct: the resulting media giant would have a market cap of over $300 billion. Furthermore:

  • CHARTER LIKELY WANTS $400/SHR, CNBC’S FABER SAYS
  • NO CHARTER, VERIZON DEAL COMING ANYTIME SOON: CNBC’S FABER

To be sure, any transaction would face a close regulatory review, given the sheer size of the businesses and some overlapping services. Both companies provide home broadband and television services in certain markets, including the greater New York area. On its fiber-optics network, known as Fios, Verizon has about 5.7 million high-speed internet customers and 4.7 million TV subscribers, primarily in the Northeast.

Some more details from the WSJ:

Verizon CEO Lowell McAdam has made a preliminary approach to officials close to Charter and Verizon is working with advisers to study a potential transaction, the people said, though there’s no guarantee a deal will materialize.

 

It is unclear whether Charter executives, including Chief Executive Tom Rutledge, would be open to a transaction. The effort could be complicated by Charter’s ownership structure, which includes cable tycoon John Malone and the Newhouse family.

A merger would bring together Verizon’s more than 114 million wireless subscribers and what remains of its landline business with Charter’s cable network, which provides television to 17 million customers and broadband connections to 21 million.

A deal would also pose a big test for new antitrust enforcers under the administration of President Donald Trump, who during the campaign expressed concerns about media consolidation. In October, he vowed to block AT&T Inc.’s $85.4 billion purchase of Time Warner Inc., saying it put too much power in the hands of too few, but he hasn’t spoken publicly on the transaction since the election.

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The idea of the merger between the two companies was first proposed by Chris Hohn, founder of hedge fund TCI, who in December predicted at the Sohn Conference in London that “Verizon over time will buy Charter (Communications).” At the time analysts roundly denied the idea: when questioned about the likelihood of such an arrangement, Recon Analytics’ Roger Entner balked at the thought. According to Entner, such a move would run contrary to around a decade of efforts on Verizon’s part to get out of wireline.

“Tell me why Verizon is selling landline and FiOS properties left and right just to buy a cable company,” Entner challenged. “Verizon has been a seller of wireline, not a buyer. The reason they bought XO (Communications) was because (XO) really didn’t have any customers and they got fiber and spectrum licenses. In three years when Frontier has money again, when they have digested California, Texas, and Florida, Verizon will most likely sell them the northeast. The key is Verizon’s strategy is getting out of retail fixed and this would get them deeper in than they ever were before.”

While fiber will certainly be an important asset for Verizon in the 5G future, Entner said a deal to buy Charter would come with the headache of lots of customers and offer very little upside. Entner guessed a hypothetical deal with Charter would cost the carrier somewhere around 10 times as much as the nearly $4 billion Verizon agreed to pay to acquire Yahoo earlier this year. Verizon’s real end game, he said, is sticking to wireless and keeping fiber assets an in-house affair.

“In the markets where they sold FiOS to Frontier simultaneously they built their own fiber backhaul using the right of ways they still had to just put them in and get done with it,” Entner said. “What Verizon is planning to do is insource their fiber backhaul, but buying Charter comes with so many headaches it’s not even funny. Who wants these headaches right when they’re cleaning up everything?”

It appears that Hohn was right after all (at least until Verizon denies the WSJ report). 

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