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Why Comcast’s Deal With Charter Makes a Sprint Buyout Less Likely

Comcast Announces Joint Venture With GE's NBC UniversalComcast Announces Joint Venture With GE's NBC Universal
The Comcast Center building in Philadelphia, Penn., on Dec. 3, 2009. Bradley C. Bower—Bloomberg/Getty Images

Wireless merger mania may not be so wild, after all.

On Monday, cable giants Comcast and Charter Communications—two of the most likely suspects tabbed by Wall Street to buy a wireless carrier—announced that they would do no such shopping without the other’s permission for one year.

Sprint, the most likely target of such attention, promptly dropped 3% as did shares of Charter. Shares of Comcast, less dependent on finding growth through wireless with its much larger entertainment business in hand, were just about unchanged.

To analyst Craig Moffett at MoffettNathanson, Monday’s agreement precludes either cable company from buying Sprint or T-Mobile on its own at a time when getting into the wireless phone business has gotten less attractive due to fierce competition among the current carriers. If one cable giant bought one of the carriers, competition would likely have been even tougher for the other cable player.

“Neither company wants a future where they are adjacent in wireline but overlapping and competing in wireless,” Moffett writes. “Either company acquiring T-Mobile or Sprint would have been an untenable situation. So where does this leave us? Well, with a lot fewer speculative deals to speculate about in the speculative game of deal speculation.”

Comcast has already announced some details of its wireless offering, which at least initially will rely on leasing airwaves from Verizon and won’t compete outside of areas where it already provides cable TV and Internet service. Charter hasn’t officially unveiled its service. But analysts likewise expect the company to stick to its current footprint for wireless, and not compete with Comcast in that arena.

The agreement could also be a hint that the cable companies all along planned a slow entry into the wireless business, hoping that in a few years, Sprint (S) and T-Mobile (TMUS) would merge and temper the competitive heat in the market now.

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“We don’t think they have any intention of acquiring an asset now,” analyst Jonathan Chaplin at New Street Research writes. “They would rather buy into a three carrier market than a four carrier market when they are ready to do a deal. A combined Sprint/T-Mobile will likely be a better asset for them to acquire in two years, when they are ready.”

Another scenario is that Comcast (CMCSA) wants to eventually merge with Charter (CHTR), creating a nationwide cable behemoth, according to analyst Walter Piecyk at BTIG Research. Such a deal would have been unthinkable in the Obama administration, which blocked Comcast from acquiring the much smaller Time Warner Cable.

But with Donald Trump in the White House and former Verizon (VZ) lawyer Ajit Pai running the Federal Communications Commission what was once unthinkable is now possible, Piecyk says.

“Many investors are skeptical that Comcast could obtain regulatory approvals to buy Charter,” Piecyk writes. “However, they were also optimistic that Comcast would be able to buy Time Warner Cable, which turned out to be misguided. The key difference is the new Chairman of the FCC.”

If that’s ultimate aim, Monday’s agreement could be a first move at getting the mega-merger approved later, New Street’s Chaplin says. “This gives them a way to test the waters,” he writes. “If there is no objection to this partnership it might make it more difficult for regulators to block a merger attempt in future (at least, the companies would cite this in their arguments).”

Or, said another way from the different point of view of public advocacy lawyer Harold Feld, who tweeted on Monday: “Doesn’t this violate antitrust laws? Do we even still have antitrust laws?”