Why You Shouldn’t Expect a Verizon-Charter Merger This Year
Charter's wireless pact with Comcast and Verizon's desire for next-generation fiber architecture would complicate a deal.
Shares of Charter Communications Inc. (CHTR) had a muted response a report that Verizon Communications Inc. (VZ) recently offered between $350 and $400 a share for the former.
Cable operator Charter traded down about 0.6% to $343.40, while Verizon dropped 0.5% to $46.39.
Verizon has had difficulty growing its wireless business as T-Mobile USA Inc. (TMUS) and others have ratcheted up competition. Meanwhile, the convergence of video, broadband and ever-faster wireless networks has companies looking beyond their legacy businesses. Rival AT&T Inc. (T), for instance, purchased DirecTV and is buying Time Warner Inc. (TWX).
While Verizon could see the appeal of Charter's deals with content providers and its fiber network, a merger of the two would be problematic for reasons besides agreeing on a price.
For starters, Charter and Comcast Communications Inc. (CMCSA) announced a pact in May that could get in the way.
Comcast and Charter announced that they will jointly seek out opportunities to expand their wireless operations and businesses. One catch is that neither can buy or sell to a wireless carrier without the other's permission for a year. Craig Moffett of MoffettNathanson LLC described the provision as a "no adultery clause."
Comcast just launched its Xfinity Mobile service in May, reselling Verizon's service. The cable company is not likely to approve of a combination of its two wireless partners as it rolls out the new service.
As Verizon designs its 5G wireless broadband networks, CEO Lowell McAdam has acknowledged the need to increase the telecom's fiber footprint to carry the growing traffic and connect to more wireless sites and devices.
Charter would add new fiber to Verizon's network.
However, McAdam has said that Verizon is building a next-generation fiber network to support services including 5G wireless networks, the Internet of things, business and home broadband. The carrier is increasing the network capacity from 144 strands in a typical deployment that supports its FiOS service to 1,700 strands of fiber per cable.
To boost its network, Verizon said in April that it will spend at least $1.05 billion to purchase 12.4 million miles of optical fiber cables per year from Corning Inc. (GLW) from 2018 to 2020.
Given its network requirements, McAdam told CNBC in April that potential targets do not have the fiber "architectural fit" that Verizon needs. "From a fiber perspective nobody. Whether you're a fiber company or you're a cable company, you don't have the architecture that we're talking about today," he said.
Of course, McAdam could be trying to lower price expectations by talking down cable's fiber architecture.
Recall that in January 2015, McAdam scoffed at reports that Verizon was in talks to buy AOL. In May of that year, Verizon agreed to buy AOL for $4.4 billion.
Given McAdam's wiliness in talks with the press, he could be playing a longer strategic game.
Comcast's wireless agreement with Charter presents an impediment to a deal for the next year at least, however. Verizon's deal with Corning shows that the carrier is will spend substantial sum to build its own super-charged fiber network. While McAdam could buy a company to add even more capacity, a deal with Charter is complicated in the near term.
