Is Verizon (VZ) Mulling to Acquire Charter Communications?

Per a recent report by The Wall Street Journal, Verizon Communications Inc.VZ , the largest telecom operator in the U.S. is exploring strategic options to acquire Charter Communications Inc.CHTR , the second largest cable MSO (multi service operator) in the nation. Although The Wall Street Journal stated there is no guarantee that the deal will materialize, a combination of two of the industry's biggest companies may be the latest one in the ongoing consolidation trend of the telecom-pay-TV-media space.

Verizon's closest rival AT&T Inc. T was the first company to set this pathbreaking trend in the telecom-cable TV-media space. In 2015, the company forayed into the pay-TV market in a big way after its acquisition of the largest satellite TV operator DIRECTV. Further, in Oct 2016, AT&T agreed to acquire media giant Time Warner Inc. TWX in an $85.4 billion cash-and-stock deal. In its recently declared fourth-quarter 2016 earnings report, management stated that its newly launched streaming TV service - DirecTV Now - was instrumental in retaining wireless customers.

Verizon is facing intensifying competitive pressure in the U.S. wireless market due to cut-throat pricing pressure from smaller players like T-Mobile US Inc. TMUS and Sprint Corp. S . In the fourth quarter of 2016, total revenue of the company decreased 5.6% year over year to $32,340 million. Verizon added 0.591 million postpaid customers (down 61.1% year over year) while prepaid customer count decreased by 0.009 million.

A combination of Verizon and Charter Communications will bring together Verizon's 114.243 million wireless subscribers, 4.694 million FiOS video subscribers and 5.653 million FiOS Internet subscribers with Charter Communications' 17 million video customers and 21 million high-speed Internet customers. Last year, Charter Communications became a giant cable MSO after its acquisition of Time Warner Cable and BrightHouse LLC.

Speculation over Verizon-Charter Communications negotiations first surfaced in Dec 2016 when Verizon's CEO Lowell McAdam said in a meeting that a merger would make "industrial sense." Notably, Charter Communications has an agreement with Verizon to operate as a mobile virtual network operator using the latter's wireless network.

We believe a merger with Charter Communications makes sense for Verizon, since the company is aiming to launch initial version of the upcoming super-fast 5G network in 2017. 5G services require connections to fiber-optic networks in dense urban areas. Charter Communications would help Verizon standardize 5G network from a technical perspective. The combined entity will also acquire a powerful position to plot a course in the future of pay-TV industry as they change during that technical evolution.

Price performance of Verizon

In the last one year, the stock price of Verizon has witnessed a growth of a mere 0.18%, underperforming the Zacks categorized U.S National Wireless industry's growth rate of 17.37% in the same time period. Nevertheless, Verizon has a very powerful diversified business model. In the wireless front, it will start initial deployment of the upcoming 5G network in 2017 while on the wireline front, the company is aggressively expanding its fiber-based footprint. In the digital media front, Verizon has become a major contender for the lucrative online advertisement business. We believe these are primary reasons behind the stock currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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