Analysts are bullish, calling it a no-brainer.
Two of the largest cable television companies in the U.S. are merging in one of the largest deals ever in the space.
On Friday, Charter Communications (NASDAQ:CHTR), the second largest U.S. cable operator, announced that it was buying Cox Communications, the sixth largest in the U.S. the deal is valued at $34.5 billion, making it one of the biggest ever.
While Charter stock has performed well this year, up 24% year-to-date and 54% over the past 12 months, it has been a difficult few years for the company. With the growing emergence of streaming, cable TV operators have been losing market share. Over the past 5 years, Charter stock has seen its value shrink 15%. Cox is not a public company.
Along with cable TV, Charter offers internet and broadband connectivity, as well as wireless mobile. Charter has 30 million internet customers but lost 60,000 in the first quarter. It has 12.7 million video or TV customers, down 7% in the quarter, and 10.4 million mobile customers, which increased 514,000 in Q1.
Mobile has been its revenue driver, as mobile revenue increased 33% in Q1, while TV/video revenue was down 8% and internet revenue rose 2%. Overall, Charter generated $13.4 billion in Q1, up 0.4%, while net income increased 9% to $1.2 billion.
“Cox and Charter have been innovators in connectivity and entertainment services – with decades of work and hundreds of billions of dollars invested to build, upgrade, and expand our complementary regional networks to provide high-quality internet, video, voice and mobile services,” Chris Winfrey, president and CEO of Charter, said.
Taking the Cox name
As part of the deal, Charter will acquire Cox Communications’ commercial fiber and managed IT and cloud businesses, while Cox Enterprises, an existing subsidiary partnership of Charter, will contribute Cox Communications’ residential cable business to Charter.
As consideration, Cox Enterprises will receive $4 billion in cash, $6 billion of convertible preferred units in Charter’s existing partnership, and approximately 33.6 million common units in Charter’s existing partnership, with an implied value of $11.9 billion. The units are exchangeable for Charter common shares. Cox Enterprises will own approximately 23% of the combined entity’s fully diluted shares outstanding.
Further, the combined entity will assume Cox’s approximately $12 billion in outstanding debt.
Within a year of closing, the combined company will change its name to Cox Communications. But Charter’s Spectrum brand for its cable and internet, will become the consumer-facing brand for the new Cox. Cox’s 6 million customers will take the Spectrum name for internet, wifi, TV, and mobile
The combined company will remain headquartered in Stamford, Conn., and will maintain offices on Cox’s Atlanta campus. Winfrey will continue as president and CEO while Cox CEO Alex Taylor will become board chairman.
“No-brainer”
Officials say the merger will better position the company to compete and innovate in an expanding and dynamic marketplace. The combined company is expected to produce higher cash flow and investment returns over time by creating more relationships on a fixed network, selling more products to each customer, and reducing operating and capital costs. Charter expects approximately $500 million of annualized cost synergies achieved within three years of closing.
Wall Street analysts mostly gave the move high marks, with Raymond James analyst Frank Louthan upgrading Charter stock to market perform. Louthan said the acquisition will drive scale and free cash flow and allow Charter to shed costs over time and reduce debt.
Oppenheimer analysts called it a “major positive” saying the combined networks will allow the company to “pursue bundling across a wider footprint.”
Jeffrey Wlodarczak, analyst at Pivotal Research Group called it a “no-brainer.”
“We believe these operating strategies are absolutely transferable to the Cox footprint, and again Charter shareholders will also get a boost from the inexpensive price paid and significant synergies and the ability to accelerate core Cox results using Charter operating strategies,” he wrote to clients, according to Morningstar.
Pivotal raised its price target to $610 per share, up from $540. That’s up 41% from the current price target of $427 per share.
This follows Charter’s acquisition of Liberty Broadband last fall, which is set to close this year. Charter stock is dirt cheap with a P/E of 11, so it might be a good time to consider this market leader after what appears to be a good strategic move.
Charter stock was up 2% on Monday.
