Charter's rural network buildout 'like cable M&A'

With little to no opportunities to grow the company through acquisitions of sizable cable operators, extending Charter Communications' network through regular edge-outs in rural areas coupled with a wave of new Rural Digital Opportunity Fund (RDOF) commitments has emerged as the next best option.

"I think that rural build is like cable M&A," Chris Winfrey, Charter's chief financial officer, said Monday at the Deutsche Bank Media, Internet & Telecom Conference.

Charter was a big winner in phase I of the RDOF auction, qualifying to receive $1.2 billion in federal government support to deploy networks covering 1.1 million locations in parts of 24 states. From a broader standpoint, Charter has committed to spend $5 billion to cover more than 1 million new customer locations in the coming years.

"You're essentially building a cable company here over several years from scratch," Winfrey said of the RDOF opportunity.

Charter expects to start some preliminary RDOF-related building this year, but does not expect it to have a material financial impact in 2021. "But the engine will be up and running, and I think 2022 will be the first decent-sized build year," he added.

Winfrey noted that the paybacks on the rural projects are longer than for other typical capital-intensive projects, but said the internal rate of return on the rural opportunity is in the double digits. Those opportunities also come with relatively low risk because the deployments put Charter in position to drive high-service penetrations in areas where there is currently little or no broadband.

"We think the returns are attractive," he said, holding that the economics are not that different from a cable M&A model, and represent a good path forward given the absence of any mid or larger-scale M&A from a cable footprint perspective.

The lack of such deals played out recently as Altice USA failed in its unsolicited play for Canadian MSO Cogeco and its Atlantic Broadband US division.

Inorganic growth "is not in our hands," Winfrey said, noting that family-controlled and family-owned businesses will decide on when or if they become available for sale. But he also allowed that there's no minimum threshold for what Charter would consider buying, so long as the target fit in with its strategy to expand into adjacent areas.

"We're open to anything," he said, noting that Charter has done deals with operators with systems that pass 1,000 or fewer homes.

CBRS caution

Although Charter has alluded that it might be able to offload up to one third of its MVNO traffic on new networks that take advantage of both licensed and unlicensed CBRS spectrum, Winfrey stressed that the operator will be measured in its rollout of CBRS-based networks.

"It's an opportunity. It's not something that we have to do," he said, noting that CBRS deployments will be largely based on the return on investment profile and targeted to high-traffic areas. "There's no rush to go deploy a network just to deploy a network. Our product can be very good...irrespective to how fast we go with CBRS because of the way it works together with Wi-Fi."

Pay-TV: Don't expect a repeat of 2020

Touching on Charter's video business, Winfrey said not to expect a replay of 2020, when the cable operator ended up adding about 19,000 pay-TV subs. Adding video subs, absent the unique, pandemic-related conditions seen in 2020, is "unsustainable," he said. Winfrey reiterated that Charter's video success in 2020 was driven by pull-throughs that came from the operator's explosive broadband service growth.

But he acknowledged that Charter has not given up on video, viewing it as an important piece of its broader connectivity business. He also hinted that Charter will soon announce the integration of several more app-based video options on its Spectrum Guide platform.

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— Jeff Baumgartner, Senior Editor, Light Reading