Verizon & Charter: No Sweet Valentines
The mooted union of Verizon and Charter does not exactly seem like a match made in heaven, according to a couple of key Wall Street analysts.
In separate notes to investors recently, both MoffettNathanson LLC and New Street Research have now thrown cold water on the reported idea of Verizon Communications Inc. (NYSE: VZ) buying Charter Communications Inc. While the two firms make somewhat separate arguments, they agree on one key point: A merger of the two companies would make a good deal more sense for Verizon than Charter because Charter has much more to offer a potential partner right now. (See Cable Has One Thing Verizon Needs.)
In the latest note penned Monday, New Street Research analyst Jonathan Chaplin argued that a merger between the two companies would ease Verizon's capacity woes while eliminating a likely wireless rival. "Verizon has much less capacity than their main wireless competitors, and owning Charter would help them close the gap in 36% of the country," he wrote. Plus, by acquiring Charter, he added, "Verizon eliminates a potential competitor in the same 36% of the country."
On the other hand, Charter stands to gain more from staying independent, continuing its strong broadband growth and following its plans to expand into wireless, Chaplin contended. "And while M&A doesn't drive our thesis," he wrote, "we think there are other deals for Charter that would be far more compelling than selling to Verizon."
Chaplin also asserted that Charter might not fare well in the merger because Verizon would likely pay much of the acquisition price in stock, not cash. That's not the type of currency that Charter would probably accept, especially since the value of that stock could well drop.
In an earlier note to investors, Craig Moffett, principal analyst at MoffettNathanson, went further, saying he doubted whether Verizon could even afford to buy Charter. "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."
Moffett also said he's not sure that a Verizon-Charter deal could clear regulatory hurdles because of the potential antitrust issues involved. In fact, he's not even sure they can legally talk to each other right now because of the broadcast spectrum incentive auction that's been going on.
The biggest takeaway from the latest spate of company earnings reports, Moffett added, is that "cable is a much better business than wireless," with much higher returns and much stronger growth prospects. "We would be hard pressed to imagine that John Malone (Charter's godfather and a leading shareholder) would be willing to trade Charter for Verizon without a very large premium."
It's difficult to disagree with the financial experts here. So I won't. In fact, given Malone's previous merger machinations and hard-driving negotiating skills, I wouldn't be totally surprised if Charter ends up buying Verizon one day rather than the other way around.
— Alan Breznick, Cable/Video Practice Leader, >Light Reading