Argus Sees Regulatory Conditions On Charter's Acquisitions Having Minimal Impact On Achieving Synergies

Argus reiterated its Buy rating on Charter Communications, Inc. CHTR saying that the regulatory conditions over deals with Time Warner Cable and Bright House Networks will have only a minimal impact on the company's ability to achieve merger synergies.

Charter expects $800 million in synergies in its first three years after the close of the TWC/Bright House deals. The acquisitions expanded Charter's potential footprint from less than 13 million households to almost 50 million.

"The integration will also entail high capital expenditures and operating costs. Still, we see significant opportunities for Charter as system upgrades proceed under the management of cable industry veteran Thomas Rutledge, the former COO of Cablevision," analyst Joseph Bonner wrote in a note.

The analyst, who has a price target of $300 on the stock, said with 17.6 million video subscribers, new Charter has become the third-largest multi-channel video program distributor after AT&T/DirecTV and Comcast Corporation CMCSA.

However, the FCC and the DOJ did attach conditions to the mergers. For seven years, Charter will be prohibited from charging usage-based pricing for residential broadband service.

"We believe that this simply preserves the industry status quo and do not expect Charter or its competitors to limit broadband service to residential customers," Bonner continued.

In addition, Charter will be prohibited for seven years from enforcing contract terms that penalize content programmers for distributing content online.

"We see this condition as the primary issue as more and more content moves online, thus threatening the traditional cable channel bundle and business model," Bonner noted.

Meanwhile, the analyst raised his 2016 pro forma EPS estimate to $4.14 from $2.57 and 2017 forecast to $5.99 from $4.43. Bonner expects long-term earnings growth rate of 5 percent.