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Wells Fargo Downplays M&A Chatter On Charter

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Wells Fargo Downplays M&A Chatter On Charter

Investors holding on to Charter Communications, Inc. (NASDAQ: CHTR) under the assumption that pending M&A will boost the stock higher may want to reconsider, at least according to analysts at Wells Fargo.

Over the past few months Charter has been named as a potential acquisition target but there is one notable problem, Wells Fargo's Marci Ryvicker commented in a research report. Specifically, there are restrictions on Charter's debt structure, which consists of both secured and unsecured debt.

Charter's total incurrence test of 6.0x limits its incremental debt capacity at $30.8 billion, which implies the acquiring company would be dependent on a lot of equity to finance the deal, the analyst continued. Also, it would be "complicated and unlikely" for any suitor to simply refinance Charter's debt to remove the 6x incurrence test (see Ryviker's track record here).

Forget About Verizon And Sprint

Meanwhile, the regulatory environment is "uncertain," which makes a tie-up with Verizon Communications Inc. (NYSE: VZ) not impossible but unlikely for several reasons, Ryvicker added. First, the high-speed data part of the combined business would boast 29 million HSD customers, which is pretty close to the 34 million customers who would have been created through a Comcast Corporation (NASDAQ: CMCSA)/Time Warner Inc (NYSE: TWX) tie-up which was proposed in 2014 and abandoned a year later.

Second, Verizon's strategy "seems to be changing almost weekly" but for at least the time being seems to be comfortable operating as a standalone entity for now. Third, a deal for Charter may not even make financial sense for Verizon given its own investment grade status and its annual $9.4 billion dividend payment.

Finally, Charter has already
made it clear it has no interest in being acquired by Sprint Corp (NYSE: S) and its parent company SoftBank, the analyst concluded. As such, Charter "has spoken" and there is no reason to do the math behind such a deal and this scenario is "highly unlikely."

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Image Credit: By Dwight Burdette (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

Latest Ratings for CHTR

DateFirmActionFromTo
Oct 2019MaintainsBuy
Oct 2019UpgradesSector WeightOverweight
Sep 2019MaintainsBuy

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