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Part 1: Analysts weigh Charter's next move in 2019 as M&A integration winds down

Heading into 2019, U.S. pay TV operators are finally moving out of the integration process that followed the massive wave of industry consolidation that occurred between 2015 and 2016.

Charter Communications Inc., which combined with Time Warner Cable Inc. and Bright House Networks LLC in 2016, is among the poster children for that consolidation. The transaction still represents the largest cable deal on record, and it made Charter the second-largest U.S. broadband provider and the third-largest pay TV operator in the U.S.

Now, more than two years after the transaction's close, the company is turning the corner on the integration process, and company executives have promised changes in the new year. Yet analysts highlight how shifting consumer habits can complicate matters.

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An end to disruption

"Our integration is coming to a close and most of the disruption will be behind us in 2019," Charter CEO Tom Rutledge said on the company's most recent earnings conference call.

Charter's integration process involved moving the entire combined company's footprint to all-digital video delivery; migrating millions of customers to Spectrum pricing and packaging with different equipment and bills; the installation of uniform business practices; the integration of various product, network and billing platforms; and parallel network upgrades.

Rutledge readily acknowledged it has not been easy.

"We said at the start of this integration that putting Charter in a position to operate as a single entity and grow faster over the long term would impact our operating and financial outputs during the integration and drive outsized capital investment in the short term," the CEO said.

Good vs. bad integration

Analysts, meanwhile, are divided on how Charter, and Rutledge in particular, have handled the integration.

"Charter … has continued to grow revenues at a mid-single digit rate, keeping cash flow margins at healthy levels. The operator continues to gain broadband subscribers at a fairly robust clip," said Tony Lenoir, an analyst at Kagan, a research group within S&P Global Market Intelligence.

The global management consulting firm Boston Consulting Group also recently cited Charter's combination with Time Warner Cable and Bright House as a "successful M&A turnaround."

In a November 2018 post, the group said Charter's integration process involved "a bold transformation" that "went beyond synergies in a full-potential plan to accelerate revenue growth, product development, and innovation through the increased scale, improved sales and marketing capabilities, and [an] enhanced cable TV footprint." The consulting group pointed to Charter's growing revenues since the close of the deal and its continued "value creation" in terms of its total shareholder return.

Nevertheless, BTIG Research analyst Rich Greenfield said in a Dec. 10 blog post that Charter management has focused too much on growing its share price in the years since the combination and focused too little on improving its video product.

"Rather than invest aggressively in their product and infrastructure, Charter continues to focus on financial engineering their way to a (not necessarily) higher stock price through continued share repurchase," Greenfield wrote.

Tightening integration processes

For his part, Joe Aberger, executive vice president of the business management consulting firm Pritchett LP, said that any integration process that lasts a year or more is "too long."

"The honeymoon ends really quickly, and the [merger] excitement wears off." he said. "Supporters start to lose enthusiasm and windows of opportunity close."

He estimated that 100 days is "the outside limit" of both employee enthusiasm and customer tolerance.

As of the end of the third quarter of 2018, Charter had lost roughly 687,000 video subscribers as compared to the quarter prior to the Time Warner Cable-Bright House deal's close in 2016. Over the same time period, the company had added 3.3 million broadband customers.

Lenoir said Charter's video subscriber losses are not indicators of a poorly managed integration process, as he noted the industry as a whole "faced a secular move away from traditional video delivery, which I'm fairly confident is what prompted those high-profile M&A deals in the first place."

"Navigating those waters and dealing with those quickly evolving video consumption preferences was always going to be a tall order," Lenoir said.

Charter did not respond to a request for comment on its integration process.

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