Merger good for Verizon, not so much Charter, analyst says

by Daniel Frankel

While merging with Charter would, to at least some degree, take care of Verizon’s cable competition and capacity problems, it wouldn’t benefit the cable company nearly as much.

So says New Street Research analyst Jonathan Chaplin, who explored the pros and cons of the much-speculated-upon merger this morning in a note to investors.

“Verizon has much less capacity than their main wireless competitors, and owning Charter would help them close the gap in 36% of the country,” Chaplin said. Cable companies will enter the wireless market this year, and by acquiring Charter, Verizon eliminates a potential competitor in the same 36% of the country.”

Chaplin, however, also said he’s “bullish on Charter.” And while the end of Verizon-merger speculation may cool the MSO’s recently heated stock valuation in the short term, “we see considerable upside … from the unrecognized growth in broadband and ultimately wireless,” he said. “And while M&A doesn't drive our thesis, we think there are other deals for Charter that would be far more compelling than selling to Verizon.”

Complicating matters further, Chaplin added, “Verizon would need to pay much of the transaction price in stock; Charter will be concerned about the impact on the value of the stock they receive due to the potential value destruction in the parts of the country they don’t cover.”

Last month, The Wall Street Journal reported that Verizon’s top executives are exploring a potential merger—news that has sent investors scrambling for stock in Charter. Indeed, the MSO’s stock rose more than 6% to $330 per share in trading immediately following the release of the WSJ’s article.

According to the WSJ, Verizon CEO Lowell McAdam has approached Charter to discuss a possible merger, and has formed an advisory team to look into the potential transaction. According to the report, it’s unclear whether Charter CEO Tom Rutledge would be open to the deal—Verizon and Charter officials declined to comment on the report.