By Shalini Ramachandran, Ryan Knutson and Dana Mattioli
Verizon Communications Inc. is exploring a combination with
Charter Communications Inc. that would unite two giants in search
of growth in a rapidly consolidating media and telecom landscape,
according to people familiar with the matter.
Verizon CEO Lowell McAdam has made a preliminary approach to
officials close to Charter, which has a market value of more than
$80 billion. Verizon is working with advisers to study a potential
transaction, the people said. There is no guarantee a deal will
materialize.
It is unclear whether Charter executives, including Chief
Executive Tom Rutledge, would be open to a transaction. The effort
could be complicated by Charter's ownership structure, which
includes cable tycoon John Malone and the Newhouse family.
A combination would bring together Verizon's more than 114
million wireless subscribers and what remains of its landline
business with Charter's cable network, which provides television to
17 million customers and broadband connections to 21 million.
Verizon has a market capitalization of $194 billion and more
than $100 billion in debt.
Buying Charter would take Verizon down a different path from
rivals Comcast Corp. and AT&T Inc., who have bet big on
combining content and distribution -- Comcast through its ownership
of NBCUniversal, and AT&T with its pending acquisition of Time
Warner Inc.
Verizon, by contrast, would be doubling down on its historical
strength in distribution, as an owner of pipes that carry web
traffic. Verizon executives have said they aren't interested in
traditional cable- or satellite-TV services, but they are big
believers in wires that power high-speed internet. Charter would
offer a large, dense fiber-and-cable network that could bolster
Verizon's coming fifth-generation wireless services, which will
require high-speed wired connections to many antennas that are
built closer to where people live, rather than one tall cell tower
covering hundreds of people. 5G networks are expected to deliver
ultra-fast internet connections wirelessly.
Both Verizon and Charter face challenges to their core
businesses. Growth in the U.S. wireless market has slowed and
pricing pressure has chipped away at profits. The cable-TV business
is threatened by cord-cutters and over-the-top video services.
Any transaction would face a close regulatory review, given the
sheer size of the businesses and some overlapping services. The
companies provide home broadband and television services in some
common markets, including the greater New York area. On its
fiber-optics network, known as Fios, Verizon has about 5.7 million
high-speed internet customers and 4.7 million TV subscribers,
primarily in the Northeast.
A deal would pose a big test for new antitrust enforcers under
the administration of President Donald Trump, who during the
campaign expressed concerns about media consolidation. In October,
he vowed to block AT&T's $85.4 billion purchase of Time Warner,
saying it put too much power in the hands of too few, but he hasn't
spoken publicly on the transaction since the election.
Many deal makers are hopeful the new administration will be
merger friendly. Mr. Trump recently appointed Ajit Pai, a
Republican, as chairman of the Federal Communications Commission,
which alongside the Justice Department oversees telecom
mergers.
In his testimony before the Senate, Mr. Trump's selection for
U.S. attorney general, Sen. Jeff Sessions, said he wouldn't have a
problem blocking mergers deemed anticompetitive. "I have no
hesitation to enforce antitrust law," Sen. Sessions said on Jan.
10. "There will not be political influence in that process."
To appease regulators in the event of a deal, analysts and
industry executives believe Verizon would likely spin off Charter
cable assets that overlap with its all-fiber Fios network in
markets like New York. Comcast and other cable companies would be
likely buyers of those, J.P. Morgan analyst Philip Cusick wrote in
a December research note.
Shares of Dish Network Corp., which has been considered a
potential takeover candidate for Verizon by some on Wall Street,
were down 7.5% in afternoon trading.
Any deal with Charter would require the blessing of Mr. Malone,
whose Liberty Broadband has a 25% voting stake in the company, and
the Newhouse family, which votes a 7% stake. People close to Mr.
Malone and the Newhouses, longtime media and cable owners, have
said both aren't married to remaining in the cable business and
would sell at the right price.
Mr. McAdam had preliminary discussions with Liberty Broadband
Chief Executive Greg Maffei, a Charter board member, in recent
months, some of the people said.
However, cable executives who know Mr. Rutledge note the Charter
CEO just completed a major acquisition and is likely looking
forward to continuing his consolidation march in cable and running
Charter.
Last May, Charter vaulted ahead to be the No. 2 cable-television
provider behind Comcast with a $55 billion cash-and-stock deal for
Time Warner Cable and a $10.4 billion deal for Bright House
Networks, a regional cable TV provider. Charter has expressed
interest in offering wireless service and said last year it was
planning to resell Verizon wireless service to its own cable
customers.
At meeting with analysts in December, Mr. McAdam, the Verizon
CEO, didn't dismiss the idea of a Charter acquisition. Asked about
the potential for such a deal, Mr. McAdam replied that such a
combination "makes industrial sense," according to BTIG analyst
Walt Piecyk.
In 2014 Verizon paid $130 billion to buy Vodafone's 45% share of
their wireless joint venture. More recently, Mr. McAdam scooped up
internet company AOL and agreed to buy Yahoo Inc.'s core internet
business for $4.8 billion in July. That transaction has been
delayed by Yahoo's disclosure last year of two massive security
breaches.
Buying Charter would make Verizon look a bit more like AT&T,
which became the biggest U.S. pay-TV provider two years ago when it
swallowed satellite provider DirecTV for $49 billion. AT&T now
has 25 million U.S. television customers and more than 91 million
phone subscribers.
Verizon last year sold its TV, internet and landline phone
business in California, Texas and Florida. But those operations
carried a large amount of copper wires, which aren't as good for
high-speed internet.
On Tuesday, Verizon projected 2017 sales and profits would be
flat from last year.
Corrections & Amplifications Verizon last year sold its TV,
internet and landline phone business in California, Texas and
Florida. An earlier version of this article incorrectly omitted
Florida and included New York on that list. (Jan. 26, 2017)
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com,
Ryan Knutson at ryan.knutson@wsj.com and Dana Mattioli at
dana.mattioli@wsj.com
(END) Dow Jones Newswires
January 27, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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