While reports of Verizon’s interest in purchasing Charter Communications have spiked the shares of the No. 2 cable operator, not to mention the imagination of the broader telecom and media industries, MoffettNathanson principal analyst Craig Moffett doesn’t think a deal is going to happen.
“We doubt it can or will happen,” he told investors in a morning blog post (subscription required).
“To be sure, we understand why Verizon would be interested,” Moffett said. “The next generation of wireless will be about small cells with small radii. And every one of those cells needs to be connected to a wire. That means lots and lots of wires. And Cable has the most wires.”
However, despite an emerging belief that there is simply no corporate merger too big or too anti-consumer enough for the Trump regime, Moffett sees challenges.
“Let’s leave aside the legal questions of whether Verizon could permissibly speak with Charter at all while the anti-collusion ‘quiet period’ rules of the incentive auction are still in effect (we are far from sure that they can). There are two bigger hurdles to clear. The first is financial. Can Verizon afford it? We suspect not. The second is regulatory. Could a Verizon/Charter deal clear anti-trust hurdles? We’re not sure.”
Starting with the financial portion of his argument, Moffett said that, “In order to consummate a deal, Verizon would have to pay a price that Charter would be willing to accept, using a currency that Charter would be willing to accept, and do so without exceeding untenable leverage ratios or an unsustainable dividend payout ratio.”
But here’s the rub:“The clearest takeaway from this week’s earnings reports is this: cable is a much better business than wireless. That may seem obvious--cable earns much higher returns, and Comcast’s cable business is growing at 8% per year while Verizon’s and AT&T’s wireless businesses are both shrinking--but it doesn’t seem to be close to being fully reflected in the two sectors’ relative valuations. We would be hard pressed to imagine that John Malone would be willing to trade Charter for Verizon without a very large premium indeed.”
On Thursday, the Wall Street Journal reported that Verizon’s top executives are exploring a potential merger with Charter Communications—news that spiked Charter’s stock more than 6% to $330 per share in the immediate aftermath.
Verizon’s own shares were down slightly to around $49 per share; the company’s stock lost significant value following the release of Verizon’s relatively uninspiring fourth-quarter results earlier this week.