Charter Loses Pay TV Subscribers in Fourth Quarter, Won't "Speculate on M&A"

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Charter CEO Tom Rutledge

Recent reports have said that telecom powerhouse Verizon was exploring a possible combination with the cable giant, led by chairman, president and CEO Tom Rutledge.

Cable operator Charter Communications, in which John Malone's Liberty Broadband owns a big stake, on Thursday reported fourth-quarter financials that exceeded Wall Street estimates, but said it lost video subscribers in the period.

It was Charter's third earnings report since closing two mega-deals, namely the $55 billion acquisition of Time Warner Cable and the $10.4 billion purchase of Bright House. The deals made Charter the second-biggest U.S. cable company behind Comcast.

Recent reports have said that telecom giant Verizon was exploring a possible combination with Charter, led by chairman, president and CEO Tom Rutledge. The talk comes following a big year of deals in the broader industry. Beyond the Charter acquisitions, telecom giant AT&T agreed to acquire Time Warner for $85.4 billion. Wall Street has been wondering whether Verizon would look to buy a cable operator, satellite TV firm Dish Network or a content company. 

Management didn't get any direct questions about a possible sale to or merger with Verizon. Asked if the Trump administration and the more cable-friendly regulatory environment it has signaled it would create has changed Charter's outlook for deals as a buyer or seller, CFO Christopher Winfrey said: "We don’t speculate on M&A generally." And Rutledge only said: "Does that affect our valuation of other M&A opportunities? It's hard to say. But we like our business.”

Charter reported fourth-quarter earnings of $454 million, compared with $130 million on a pro-forma basis in the year-ago period driven by higher income from operations and a $366 million pension revaluation gain. The pro forma figure assumes that Bright House and Time Warner Cable had been part of Charter in the year-ago period as well. Revenue rose 7.2 percent.

The cable firm lost 51,000 residential video subscribers in the latest period, compared with a gain of 118,000 in the year-ago period on a pro forma basis, ending December with 16.8 million residential video subscribers, down 1.3 percent. It added 12,000 video subs in its small and medium business operation, up from 7,000 in the year-ago period.

During the fourth quarter, Charter's residential customer relationships grew by 250,000, versus 359,000 in the prior year period. As the key reason for the year-over-year decline, it cited "elevated churn from Legacy Time Warner Cable historical pricing and packaging." Time Warner Cable had launched promotional offers in 2015, which Charter has ended since taking over the company, which has affected subscriber trends.

Rutledge in the earnings report said about the progress of the company's big recent acquisitions: "Our integration is going well. We also continued to grow in 2016, with pro forma customer growth of nearly 5 percent. ... In 2017, we remain focused on applying our growth-oriented operating strategy across our new footprints, driving more customer satisfaction, growth and shareholder value.”

Discussing possible regulatory changes in Washington under the Trump administration, Rutledge on the earnings call said “a better FCC” was possible under new chairman Ajit Pai. “All [areas of regulation] look to be better for us than under the previous regime.” Management also said that possible tax changes would likely be a net positive for the company.

Does it change any conditions of the TWC and Bright House acquisitions? Rutledge said Charter has the right to petition for a shorter run time of conditions, adding that "in a better regulatory climate, there would be a greater likelihood of achieving those reductions."

But he emphasized that the company was "bullish" on the deals before the new White House. "It appears to be better, which is good for us and makes us more excited about the future of our business than we were previously," the exec said. 

Charter also said Thursday that it would next year launch a wireless service using Verizon's network based on a deal that the cable giant recently activated. “Our goal is to include wireless services in our packages and drive more customer relationship growth,” said Rutledge. Comcast has said it would launch a mobile service this year.

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