CHTR Charter Communications Inc New

By Ryan Knutson and Shalini Ramachandran 

Why would the nation's largest wireless carrier want to buy the nation's second-largest cable company?

As it explores a potential merger with Charter Communications Inc., Verizon Communications Inc. is signaling that the future of wireless is in wires.

Unlike cellular networks built over the past three decades, which rely on tall towers that can cover thousands of people over miles, next-generation networks will be designed around large numbers of antennas that cover only a few dozen people. Each of those antennas needs a wire connecting it back to the internet.

Cable companies, which spent decades stringing wires deep inside cities to deliver cable TV to homes, are particularly well suited to supply those connections.

Densely penetrated high-speed wires are especially valuable for 5G, the next evolution in wireless network technology. Verizon, with 114 million wireless customers, hopes its 5G technology will enable the wireless delivery of gigabit-per-second speeds, something currently only possible over wires.

Verizon has a fiber-optic network in nine northeastern states, and acquiring Charter would greatly expand its footprint. Verizon recently sold some of its wires in California, Florida and Texas, but much of that network was made of copper, which isn't useful for high speeds.

Verizon's interest is preliminary and it's unclear that a deal will materialize, but a Charter acquisition would be hard for it to swallow. Verizon has more than $100 billion of debt, and Charter has about $60 billion. Analysts say the combined company would likely face a downgrade of its credit rating, which would make borrowing money more expensive.

Craig Moffett, an analyst at MoffettNathanson, said the debt hurdle may be enough to prevent a deal from happening.

"Here's the challenge: First Verizon has to figure out how they would pay for it, and then you would have to think about how you can get it through the Federal Communications Commission and DOJ," he said. "I'm not sure it can make it through the first hurdle."

The regulatory challenge is no small hurdle, either. Gene Kimmelman, a former Justice Department antitrust official, said these types of deals lead to fewer options for internet access and "create enormous bottlenecks to the free flow of information on the internet."

Other analysts were equally skeptical. In a note to clients, Citigroup analysts wrote that the "strategic logic of Verizon-Charter combination [is] far from compelling." The Citi analysts believe large parts of Charter's network wouldn't be very useful for 5G. "Bottom Line: We think it's very unlikely that Verizon acquires Charter."

The combined company would have roughly 20 million pay-TV subscribers, thus helping it negotiate better content deals. But contracts with content providers expire over time so the savings couldn't be immediately realized. J.P. Morgan analysts pegged programming cost savings at just $300 million annually. It would also be difficult for Verizon to realize much savings from combining its wire-based Fios network with Charter's cables since they're based on different technologies.

Meantime, Verizon's wireless business is under pressure from surging rivals. Earlier this week, Verizon reported its third consecutive quarterly sales decline after six years of growth. Combing with Charter would also help diversify its revenue stream.

A deal would further diverge Verizon and AT&T, rivals that once behaved in near lockstep. Verizon would be close to matching AT&T's large pay-TV customer base, but it would have a more robust broadband network. AT&T's 2015 acquisition of DirecTV didn't add broadband internet infrastructure. And AT&T has placed a bet on content with its proposed purchase of Time Warner Inc.

"While they might look vaguely similar on the surface, in reality they're not remotely the same," Mr. Moffett said. Verizon's "strategy would seemingly be in support of their wireless business where AT&T's strategy would seem to be diversify away from it."

A Verizon-Charter combination would be less about bundling cable TV, internet and cellphone service into a single package, as AT&T is doing with DirecTV. Verizon could sell bundles where it has Fios, but it chooses not to because bundling usually leads to discounting.

Verizon has also said it isn't interested in investing in the legacy television business, and instead has been focused on developing short-form mobile content that appeals to young people. That mobile video strategy, which involved the launch of its go90 app, has been slow to take off. Verizon recently laid off more than 150 employees in its go90 unit.

(END) Dow Jones Newswires

January 26, 2017 16:44 ET (21:44 GMT)

Charter Communications (NASDAQ:CHTR)
Historical Stock Chart
From Jun 2024 to Jul 2024

Charter Communications (NASDAQ:CHTR)
Historical Stock Chart
From Jul 2023 to Jul 2024