How Verizon Could Spin a Cable Megamerger Into Gold

January 26, 2017, 6:34 PM UTC

The rise of telephone and cable TV networks relied on the kinds of inefficient and bandwidth hogging designs that the Internet has all but vaporized. Verizon and AT&T are pulling out copper wires wherever they can, while cable companies like Comcast and Charter Communications are also rebuilding much of their infrastructure with fiber optics.

The new networks offer faster, cheaper, and ultimately more reliable ways to send phone calls, TV shows, and web sites down the pipes to eager consumers. Still, some kind of wired connection is required to link up the 100 million consumer households to the new networks and that’s one of the most expensive, time consuming, and vexing issues facing the industry. The so-called “last mile” problem has also befuddled many would-be new competitors, from dozens of well-capitalized 1990s telecom startups to, more recently, Google’s Fiber unit.

Verizon CEO Lowell McAdam is among those dreaming of a better way—a wireless way—that could deliver the benefits of super high speed fiber optic connections to consumers without the costs and delays. And it’s a dream that is leading him increasingly in the direction of merging with one of the cable giants like Comcast or Charter. After McAdam last month publicly mused about how it would make “industrial sense” to combine with Charter, the Wall Street Journal reported on Thursday that he’s broached the idea of such a deal with Liberty Media CEO Greg Maffei, who also happens to be on Charter’s board. No proposal is yet on the table, and Verizon has considered 10 possible merger partners, Bloomberg added.

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The big idea McAdam sees as a possible future is that instead of sending a crew out to run fiber optic cable from utility poles into every house in America, a carrier could just pop a bunch of wireless routers in the mail and have the customers get the whole deal up and running themselves in minutes. Verizon is already running trials of just such a wireless broadband system around the country.

The challenge is that the new wireless technologies being developed, dubbed fifth generation or 5G, rely on using high frequency airwaves that can carry vastly more data than the lower bandwidths in use today. But while 5G signals in the 28 GHz or 39 Ghz range can carry more data, they don’t travel as far or penetrate obstacles or bad weather anywhere near as well as today’s 4G LTE technology in lower bands such as 700 MHz or 1900 MHz.

And that means there will need to be many more wireless cells broadcasting 5G signals and attached back to a carrier’s main network than have been deployed for current 4G mobile networks. Adding more cells raises the question of whether the whole strategy of reducing costs by avoiding wiring homes will be negated by the expense of the new 5G connections.

And that’s where the logic of combining a big wireless network (like Verizon’s) with a big cable footprint (like Charter’s) starts to make sense. Charter, Comcast, and other cable operators have already been spending big to push fiber optic networks deeper into neighborhoods and closer to customers’ homes. Verizon could possible speed up and reduce the cost of its 5G plan by piggybacking the new small cells on a cable company’s expanded neighborhood networks.

But there are also many questions about the logic of such a deal. For one, Verizon (VZ) took on massive debts to buy out its wireless partner, Vodafone, for $130 billion in 2014. Even before the deal was completed, the carrier started promising Wall Street it would deleverage and get back to its prior, less risky debt load ratios within a few years. That might be impossible if the carrier tried to buy Charter, which has a stock market value of almost $100 billion plus its own debt of over $60 billion. Comcast’s (CMCSA) stock is valued at about $180 billion and the company also has some $60 billion of debt. Charter’s (CHTR) top executives don’t think Verizon can afford to buy them out, Bloomberg reported on Thursday.

Top telecom and cable analyst Craig Moffett was even more blunt in his assessment, given the large premium Charter would be seeking. “Paying that premium without reaching untenable leverage would be very hard,” he wrote on Thursday. “Doing so without also incurring an untenable dividend payout ratio might be impossible.”

Furthermore, the 5G revolution may be a pipe dream. Pre-commercial trials have started, but it’s almost impossible to know yet just how many cells will have to be deployed in neighborhoods nationwide to maintain reliable service or whether the economics will make any more sense than relying on wired home connections.

To learn about Qualcomm’s 5G plans, watch:

Still, McAdam is facing a tough status quo situation. He sits atop a $126-billion-a-year behemoth with slowly shrinking revenue, facing investors, and analysts who are demanding both fat dividends and new paths to growth. Investors weren’t pleased this week after new CFO Matt Ellis conceded that Verizon no longer expects to see any revenue growth in 2017, contrary to earlier forecasts. Relatively small acquisitions like AOL and the proposed Yahoo (YHOO) deal are bringing faster-growing digital ad revenue, but it will be years before that can offset the slowdown of wired and wireless telephone service sales.

Buying a big cable company certainly doesn’t solve that problem–cable is seeing its own challenges from cord cutting and out-of-control programming costs. But maybe, just maybe, it brings a brighter wireless future closer to fruition.

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