5G driving Verizon to Charter? Not so much, says Jefferies analyst

Verizon store front (Monica Alleven)
Fiber is a "critical asset" according to a Verizon spokesperson, but acquiring cable assets isn't a plug-and-play solution for 5G, a Jefferies analyst told investors.

While some reports pegged Verizon’s interest in Charter Communications to 5G, others unsurprisingly are not so sure about that reasoning.

Reports surfaced this week that Verizon could be eyeing a potential merger with the nation’s second-largest cable company, in part because it could tap into the wired connections it owns and use those to feed the massive number of antennas envisioned in 5G, offering gigabit-per-second speeds. Verizon operates a fiber-optic network in nine northeastern states and acquiring Charter would expand that footprint.

However, plenty of analysts remain unconvinced that 5G would be the key driver in acquiring cable assets. “In our view, legacy cable plant, which would require significant investment to service a 5G platform, isn’t a plug and play solution. Although Verizon management often discusses their interest in rapidly deploying 5G technology, we question whether this is simply a way to divert attention from the fiercely competitive core business,” said Jefferies analyst Mike McCormack in a note to investors. “Standards remain years away, and the equipment ecosystem even for fixed wireless 5G remains nascent. We do not believe 5G is a reality for at least the next 5 years, if not longer.”

Signal propagation and the required density of the network make the technology useful only in niche dense markets, he added, and “a significant part of the opportunity for 5G would be the share taking from cable broadband, making the acquisition of Charter that much more unlikely. We also do not see the Charter footprint as ideal for a technology that would rely on dense urban markets for the most economically beneficial deployments.”

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While reports emphasized that talks were preliminary and it’s unclear a deal would materialize, McCormack noted that a key question is whether the parties can be speaking at all given that the broadcast auction is ongoing. “We don’t’ have a firm answer on that front, but it could be that there have been no discussions whatsoever,” he wrote.

Barclays analysts said while there is some reality to the thought process at Verizon to acquire a cable asset, it’s not clear why Verizon has to rush into a deal at this time. “The only scenario under which VZ has to move first is if it considers the risk of CHTR either being taken out by someone else or CHTR acquiring TMUS or S being high,” the analysts said, adding: “VZ may be compelled to make its long term strategic choice between cable or stand-alone wireless business over the course of 2017.”

Interestingly, Verizon has emphasized the need for fiber in terms of supporting its 5G endeavors and CFO Matt Ellis said during the company’s fourth-quarter earnings call earlier this week that the addition of the XO assets will add to its base. “As we’ve mentioned, fiber is a consistent part of our business so that is something you should expect to see us continue in,” Ellis said, according to a transcript. “We’ve talked about what we’re doing in Boston, you should continue to see us do that.”

“Fiber is going to be a critical asset for us,” he added. “It’s a critical asset today and it will certainly continue to be so as we go into the future. One thing it allows us to do—and this certainly is within our footprint—is it replaces the core copper networks that have served us well over the years. But from a capability standpoint and also just a maintenance standpoint, it certainly makes a lot of sense for us to continue to replace copper with fiber… fiber is going to be critical for us as we densify 4G and think about 5G. That explains why the XO transaction was interesting to us, getting those metro rings in 45 of the top 50 markets.”

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Increasingly, cable companies are getting more serious about entering the wireless business and Verizon is talking about fixed wireless being the first application of 5G, competing with cable for the home. During the earnings call, Ellis was asked about Comcast’s MVNO strategy, one that Verizon facilitates. Ellis said Verizon doesn’t expect Comcast’s moves to necessarily have a major impact during the course of 2017. “They’ve got a lot of work to do there and I’ll let them talk about their strategy on that,” he said.