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On Monday, UBS analysts maintained their Neutral rating on Charter Communications (NASDAQ:CHTR) stock, alongside a steady price target of $400.00 following the company’s announcement of a significant acquisition. The stock, currently trading at $427.36, has shown remarkable strength with a 24.65% gain year-to-date and sits near its 52-week high of $437.06. According to InvestingPro analysis, the company appears slightly undervalued based on its Fair Value metrics. Charter Communications has entered into a definitive agreement to purchase Cox Communications in a transaction valued at $34.5 billion, comprising both stock and cash. This deal assigns Cox Communications an enterprise value of approximately 6.4 times its projected 2025 EBITDA, which, including synergies, could dip below 6 times. Historically, scaled cable mergers and acquisitions (M&A) have been valued between 7 and 13 times EBITDA.
The acquisition is set to expand Charter’s reach, increasing its footprint to around 70 million passings, compared to its current 57 million and Comcast (NASDAQ:CMCSA)’s 64 million. UBS analysts project that the deal may be around 10% dilutive to Charter’s free cash flow per share over the next two to three years, but they anticipate it will become accretive as operational synergies are achieved and Charter applies its strategic approach to the newly acquired Cox territories. This strategy involves driving growth in broadband, video, and mobile services through improved pricing and packaging.
Cox Communications’ network is noted to be well-positioned, having already been upgraded to offer 2:1 Gbps speeds. It is also recognized as the first cable company to explore commercial opportunities aggressively. UBS suggests that this advanced state of Cox’s network could imply less potential for improvement compared to Charter’s previous acquisition of Time Warner Cable, which required more extensive upgrades.
The analysts estimate that the deal will increase Charter’s leverage to 3.9 times net debt to EBITDA by the end of 2026. However, management aims to maintain leverage at a midpoint range between 3.5 and 4 times, compared to the previous target of 4 to 4.5 times. This adjusted leverage target is expected to allow Charter to continue its share buyback program at a similar scale to its standalone operations, with UBS estimating an average of $8 billion per year in buybacks, equating to roughly 10% of the pro forma market capitalization. InvestingPro data shows Charter maintains a "GOOD" overall financial health score of 2.79, with particularly strong momentum and profitability metrics, suggesting solid fundamental positioning for this strategic move.
In other recent news, Charter Communications has been at the center of significant developments following its proposed merger with Cox Communications. The merger, valued at $34.5 billion, is set to create a dominant force in the U.S. cable industry. Liberty Broadband (NASDAQ:LBRDA) has announced plans to expedite its acquisition by Charter, aligning it with the Charter-Cox merger timeline. This strategic move is supported by Liberty Broadband’s commitment to vote in favor of the merger. Analysts have responded positively to these developments, with Loop Capital Markets upgrading Charter’s stock to Buy and increasing the price target to $510. Raymond (NSE:RYMD) James also upgraded Charter’s stock rating to Market Perform, highlighting the financial benefits expected from the merger. The merger is anticipated to enhance Charter’s financial performance by improving free cash flow and reducing leverage. Charter’s ongoing initiatives, including its Life Unlimited rebrand and new video strategy, are seen as promising steps toward maintaining subscriber growth. The merger with Cox is expected to further boost Charter’s competitive edge and operational efficiencies.
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