The new wireless agreement between Comcast and Charter Communications announced this morning positions the two cable companies on firmer footing as the industry races toward 5G. It also appears to close a door to Verizon, while potentially opening one for Dish Network.
Perhaps most importantly, the agreement between Comcast and Charter adds yet another layer of complexity onto the merger-and-acquisition playground. Meaning, it will probably take longer for telecom executives to complete the kinds of megadeals that many in the industry expect now that the FCC’s auction quiet period is over. (It’s also worth noting that M&A speculation has definitely reached a fever pitch, with one analyst suggesting a possible three-way merger among Dish Network, Amazon and T-Mobile.)
Looking toward 5G
The agreement between Comcast and Charter is ostensibly a knowledge-sharing deal for wireless. Specifically, the companies said they would create “common operating platforms; technical standards development and harmonization; device forward and reverse logistics; and emerging wireless technology platforms.”
Both Comcast and Charter have already said they’re researching the kinds of high-band wireless technologies that form the basis of 5G. Today’s agreement could tie together their work on the field, which is noteworthy considering the two companies jointly own 214,000 fiber route miles, according to Wall Street analyst firm BTIG, which “could provide a critical backbone that would enable the densification anticipated for 5G services,” BTIG analyst Walter Piecyk wrote this morning (sub. req.).
The agreement also ensures cooperation between Comcast and Charter with any MVNOs they might launch. Comcast already offers its Xfinity Mobile MVNO through Verizon, and Charter has made no secret of its plans to launch a similar service sometime next year, through its own existing MVNO deal with Verizon.
But MVNOs from cable companies haven’t proven very compelling. For example, the Pivot joint venture a group of cable companies formed with Sprint was eventually shuttered in 2008. And the new Xfinity Mobile MVNO from Comcast doesn’t do much more than protect the company’s current customers from strategic overtures from wireless operators hoping to drive a wedge between Comcast and its customers using over-the-top pay-TV services.
Possible trouble for Verizon
But today’s agreement between Comcast and Charter is much more than a simple knowledge-sharing arrangement. It acknowledges “possible further consolidation among national wireless competitors” and includes detailed, specific language that prohibits either Comcast or Charter from engaging in material investments, mergers, or acquisitions within the wireless industry without the consent of the other company. If the two companies can’t reach an agreement on the M&A, the agreement allows them to pursue a transaction only after a six-month waiting period, following a 30-day written notice period.
It’s that element of the agreement between Comcast and Charter—to work together on wireless mergers and acquisitions—that has Wall Street analysts predicting more trouble for Verizon and more opportunities for Dish.
“We think that this agreement indicates a low probability of a VZ-CHTR combination over the next 12 months as it seems unlikely that CHTR would have agreed to this partnership if they were, in fact, engaged in productive discussions with VZ,” wrote the analysts at Deutsche Bank in a note to investors this morning immediately following the announcement from Charter and Comcast. Reports from earlier this year indicated Verizon was potentially considering purchasing Charter. “This also raises the question that if VZ-CHTR is now less likely, does it mean VZ engaging in some kind of agreement with DISH in order to procure spectrum is now more likely?”
Other analysts agreed that the new deal between Charter and Comcast throws more cold water on a possible move by Verizon to acquire or merge with a cable company.
“The partnership makes it less likely that either Company is contemplating a deal with Verizon at the moment, which means that DISH remains as the only credible option for Verizon to address its capacity shortfall in the near term (and we suspect they don't have long to wait with traffic growth per user accelerating to 60% after the launch of unlimited),” wrote the analysts at New Street Research. “For what it is worth, based on comments made by Verizon management, we suspect that they have already had discussions with Charter, and the discussions didn't result in a deal.”
“Now what for Verizon?” added BTIG’s Piecyk. “Now that a purchase of Charter and a sale to Comcast appear to be off the table for Verizon, its options for a strategic deal to change the company’s direction have been materially altered.”
Indeed, it appears the new Comcast-Charter deal stands as yet another obstacle to Verizon. Just last week Verizon acknowledged that it no longer expects it will be able to “achieve an upgrade to our pre-Vodafone credit rating" by 2018 or 2019, as it had previously hoped. As a result, ratings firm S&P raised the debt standard that Verizon needs to meet to improve its credit rating.
Sprint + T-Mobile + Dish?
Analysts in general said they believe the new agreement between Charter and Comcast could also help hasten a merger between Sprint and T-Mobile. “The emergence of cable as a serious new entrant significantly improves the odds of a Sprint / T-Mobile merger being approved. This announcement on its own may not be enough to convince regulators that we are in a five carrier market, but it helps,” noted the analysts at New Street.
And the Comcast-Charter transaction again underscores the important role that Charlie Ergen’s Dish plays in the space. During the past several years the company has acquired a massive trove of spectrum, stretching from 600 MHz to AWS-3 licenses. Dish’s spectrum holdings could either be used to build another nationwide wireless network (like for a couple of cable operators) or to significantly bolster an existing one (like T-Mobile’s).
Whatever Dish, Verizon, Amazon, Sprint, T-Mobile and others end up doing in terms of M&A in wireless, it’s clear that they will have to deal with a largely united cable industry (Comcast and Charter are by far the nation’s two largest cable operators). It’s also clear that the M&A speculation game has become much harder.
As the analysts at MoffettNathanson noted this morning of the Comcast/Charter deal: “So where does this leave us? Well, with a lot fewer speculative deals to speculate about in the speculative game of deal speculation.” – Mike | @mikeddano