Investing.com -- Fitch Ratings has placed the ’BB+’ Long-Term Issuer Default Ratings (IDRs) of Charter Communications (NASDAQ: CHTR ), Inc., Charter Communications Operating, LLC, CCO Holdings, LLC, Time Warner Cable, LLC, and Time Warner Cable Enterprises LLC on Rating Watch Positive (RWP). This decision reflects the anticipated change in structure and leverage following Charter’s acquisition of Cox Communications, Inc., which is expected to close in 2026.
The acquisition will enable Charter to significantly enhance its operational scale and reduce its total leverage. The company has announced a substantial reduction in its target leverage range from 4.0x-4.5x to a new range of 3.5x-4.0x, which is expected to be reached within two to three years of the deal’s completion.
The addition of Cox will expand Charter’s scale benefits as the largest U.S. multichannel video programming distributor (MVPD), with a combined pro forma 37.6 million total customer relationships. This will surpass the domestic customer count of Comcast Corp (NASDAQ: CMCSA ). Charter’s operating strategies have resulted in relatively lower customer losses compared to the overall industry for several years.
The acquisition of Cox includes $11.9 billion of equity consideration and is expected to result in a net reduction to current leverage levels. The combined entity will have a total pro forma debt of approximately $111 billion.
Management expects to achieve approximately $500 million in operating cost synergies, which should drive an increase in the growth trajectory of EBITDA within several years post-closing. This expected EBITDA growth, along with lower overall capex as Charter’s current expansion and network evolution initiatives are expected to be largely completed by 2027, should accelerate pro forma free cash flow growth thereafter.
Charter’s mobile offering has enjoyed significant success, growing to more than 10 million lines. The incorporation of Cox’s mobile offering, which is still in its early stages, is expected to accelerate growth and reduce churn in the coming quarters.
In September 2024, Charter launched Life Unlimited, a customer initiative offering reliable connectivity, same-day on-site technical service, transparent pricing and service updates, and product refunds for inadequate service and support. The expansion of this initiative throughout the Cox footprint is expected to reduce churn and increase the number of new broadband subscribers.
Charter leads the industry with innovative new carriage agreements with major programmers like The Walt Disney Company (NYSE: DIS ) and Warner Bros. Discovery (NASDAQ: WBD ), Inc., offering video subscribers access to ad-supported direct-to-consumer (DTC) platforms at no extra cost. The expansion of these carriage arrangements across the Cox footprint is expected to stabilize its video segment.
Charter is well positioned in the MVPD space given its size and geographic diversity. It is the largest U.S. cable MVPD with 31.4 million total customer relationships and the largest U.S. linear video content distributor with 12.7 million customers.
Charter plans to continue issuing debt under additional debt capacity from EBITDA, maintaining a target leverage range of 4.0x-4.5x, with company guidance to a tighter range of 4.0x-4.25x until the close of the Cox transaction. Fitch expects proceeds from prospective debt issuance under this additional debt capacity to be used for shareholder returns, along with internal investment and accretive acquisitions.
Revenue over the rating period is expected to be relatively flat as wireless growth offsets near-term broadband pressures and continued declines in the video and voice segments. EBITDA growth is expected to slow, but margins should improve slightly, driven by wireless platform improvement. Capex will remain elevated in 2025 but is expected to decline significantly beginning in 2026 due to the completion of the Rural Digital Opportunity Fund (RDOF) line extensions in 2026, two years ahead of schedule, and the expectation of major network evolution spending to be completed by 2027.
Free cash flow (FCF) is expected to more than double from approximately $4.3 billion in 2024 to nearly $10 billion in 2028. The company is expected to continue using the bulk of its FCF generation for share repurchase activity. Charter is expected to remain opportunistic in the capital markets to refinance near-term maturities, with potential additional issuance to fund shareholder returns using debt capacity created by EBITDA growth.
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