The Wall Street community has reacted positively to Charter Communications' (NASDAQ: CHTR) decision to pursue a $10.4 billion purchase of Bright House Networks, sending the MSO's stock up 5.3 percent as of the close of the Nasdaq Tuesday.
Privately owned by billionaire Si Newhouse, Jr.'s Advance Media, Bright House also received a notable nod from investment bank Jefferies, noting that the MSO needed to be purchased by a bigger cable operator because it's about to lose a valuable resource if the federal government approves Comcast's $45.2 billion purchase of Time Warner Cable (NYSE: TWC).
As part of the deeply interwoven relationship between Bright House and TWC includes the latter uses its sizable video services reach to negotiate program deals for the former.
"We believe that Bright House would not be forging on this path if its management did not believe that the Comcast (NASDAQ: CMCSA) and Time Warner Cable deal would likely gain regulatory approval," Jefferies told its investors Tuesday. "Under its current relationship with Time Warner Cable, an entity partly owned by Time Warner Cable purchases programming on behalf of Bright House, allowing it to benefit from greater scale in content negotiations in exchange for a management fees. The company is also able to procure equipment at Time Warner Cable's rates. It is uncertain that regulators would allow this relationship to exist post the Comcast/Time Warner Cable transaction close…"
Brighthouse currently touts around 2.1 million subscribers. But combining with Charter creates an operation with more than 10 million pay-TV customers--reach approaching what TWC has before the Comcast merger.
"Scale has always been important in this industry, especially as a way to get good deals on content, which is the single biggest cost driver for these companies," said Jan Dawson, an analyst with Jackdaw Research. "Given the scale benefits, it's natural that they want to combine."
Overall, media analysts have reacted positively to the deal. Most believe its close will follow the successful completion of the Comcast-TWC merger, and that an aggressive Charter will soon swallow even smaller operators, such as Suddenlink, Mediacom and Cable One.
"I think it is inevitable most of the rest of the cable industry not owned by Comcast is sold to Charter," Pivotal Research Group analyst Jeff Wlodarczak told Reuters.
With Charter acquiring cable systems that are largely converted to digital in fast-growing Florida regions, Moody's noted, "The acquisition of BrightHouse would bring an upgraded asset base and footprint with higher customer penetration than Charter's existing footprint."
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