What a weekend it’s been in the telecommunications sector. CNBC is reporting that cable operator Charter Communications, Inc. (NASDAQ:CHTR) is again a potential acquisition target of Softbank Corp. (Japan) (OTCMKTS:SFTBY).
In other words, Charter looks like Softbank’s “Plan B,” and a way to capture some value for Sprint stock. But, at least in early trading, that Plan B looks like good news for Charter shareholders — and bad news for just about everyone else.
Is Softbank Buying Out CHTR Stock?
CNBC’s David Faber, a well-respected voice when it comes to M&A, is reporting that Softbank is looking to “re-engage” Charter on merger talks. That echoes a similar report from the New York Post last week. Softbank and Charter held talks in July, with Faber now saying Softbank’s offer was in the range of $540 per share.
That was enough to draw the support of Liberty Media Corporation (NASDAQ:FWONA,FWONK), who owns 27% of Charter — but apparently not enough to entice Charter management. (One potential sticking point: Charter’s CEO has an options package that vests at $564 per share.)
Softbank’s plan this summer was to buy Charter with at least 50% cash and shares in a new company that would combine the cable operator with Sprint. Charter instead chose to go it alone, maintaining a resale partnership with Verizon Communications, Inc. (NYSE:VZ) in the process.
The question is whether Charter might be more amenable to a deal this time around. The stock traded above $340 when Softbank’s interest was first reported; the stock fell below $310 just a few weeks ago. CHTR stock actually declined over 20% just between early September and the beginning of this month, as fears of accelerated ‘cord-cutting’ pressured it and larger rival Comcast Corporation (NASDAQ:CMCSA).
So far, investors seem skeptical Charter will bite. CHTR shares are up 5%-plus on this morning’s report, but still trade just above $350. With the cable business looking like it may be under pressure than previously realized, however, Charter management may see Softbank’s interest as an out — or its minority owners at Liberty may decide to put more pressure on the company to do a deal.
What Softbank-Charter Means for Everyone Else
Were it to go through, a Softbank-Charter deal on its own probably wouldn’t change the playing field in telecommunications all that much. But the deal only is being discussed at the moment because the Sprint-T-Mobile deal fell through, which has had a negative effect that’s ricocheted around the industry:
- S stock is down 12%, and TMUS has declined almost 6%.
- Verizon shares are down 4%, and AT&T Inc. (NYSE:T) has fallen 1.5%, as hopes for a three-competitor market are dimmed.
- Softbank stock is off nearly 5%, with the company’s third quarter earnings release possibly contributing as well.
- Comcast is flat, but DISH Network Corp (NASDAQ:DISH) has gained 6%. DISH has been a reported potential partner for Sprint for some time, given its billions of dollars’ worth of spectrum, and made an unsolicited bid for Sprint back in 2013.
The progression of Softbank-Charter negotiations, if they happen at all, could have more impact than an actual deal. The US telecommunications space simply isn’t healthy at the moment. As I wrote last month regarding AT&T stock, the wireless business has turned into a cutthroat space with intense competition on pricing. Cable companies are losing subscribers faster than many predicted. T stock is at a two-year low, Sprint is down 21% YTD and Verizon -11%; DISH, CMCSA, and CHTR all have pulled back of late.
Just an agreement by Charter to talk would signal that management sees the writing on the wall. And it very well could set off a round of consolidation as providers look to drive scale — and cut costs.
A mega-merger between Comcast and Verizon would be in play. DISH could re-engage with Sprint or look to combine with T-Mobile. If the wireless and cable industries are as tough as some investors fear, everything would be on the table.
What Investors Should Do
For now, the entire industry looks like an “avoid,” at least for long-term investors. The failure of the Sprint-T-Mobile deal looks like a catalyst for upheaval in the space.
The problem is that upheaval is coming because the industry’s players can’t get what they truly want. Softbank isn’t approaching Charter because it wants to — it wanted a merger with T-Mobile, but couldn’t complete it at the price it wanted.
Verizon didn’t want to offer unlimited dat, it had to match competitors. DISH has wanted to monetize its spectrum for years — but hasn’t found the right deal.
This is not a healthy space, and Monday’s news doesn’t make it any better. At the right price, stocks in the sector have value, but in most cases, I’m skeptical we’re anywhere close to the right price.
As of this writing, Vince Martin has no positions in any securities mentioned.