New Charter sub growth and synergy projections 'too low,' analyst says

With regulatory approval of Charter's (NASDAQ: CHTR) bid to acquire Time Warner Cable (NYSE: TWC) and Bright House Networks in "the final stages," New Street Research said it expects the combined company to perform better than expected in a number of key areas.

"Expectations for sub growth are too low," the firm told investors in a Thursday-morning note, the day after it was reported that the FCC was ready to approve the mergers.

"Charter didn't seem to get much credit for beating on subs in 2015," New Street added. "We think it will be different for two reasons this year: first, growth expectations never properly reset during 2015, as estimates increased to account for beats but not for the change in the trend (consensus has consistently reflected a sharp fade in growth while in reality growth has been accelerating); the transition from a trend of growth accelerating into 4Q15 to slowing sharply through 2016 looks increasingly silly and ought to reset. Second, there have been a number of overhangs holding investors back, not least of which has been uncertainty around the deal (OTT threat; price regulation; STB regulation; etc.). We think these fears will ebb in 2016."

Estimates for cost-saving efficiencies are also too low, New Street said. "We estimate synergies of $1.5 billion in five years and $1.1 billion in three years vs. guidance of $800 million three years," the firm noted.

Meanwhile, with Altice NV also signaling that it expects to close its $17.7 billion acquisition of Cablevision (NYSE: CVC) in May, Barclay's told its investors to expect a wave of further deals to follow.

"Post the completion of pending cable deals, there is some likelihood of potential asset swaps between the remaining distributors to align footprints more closely and extract more in synergies," Barclays said. "While the regulatory push-back is fair to consider in this instance, we note that the FCC has concluded in the past that pro-competitive effects of clustering of cable systems tend to outweigh the negatives."

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