Charter Communications CHTR and Cox Communications have agreed to merge in a landmark deal valued at $34.5 billion, including debt. The merger will bring together two of the top three cable companies in the United States and create a major player in the cable and broadband industries, competing with Comcast CMCSA. The proposed deal is one of the largest in more than a year.
The Charter-COX merger has the potential to reshape the U.S. cable and broadband industry, with key communication services ETFs poised to benefit. Investors may look to these ETFs to capitalize on sector gains without taking on single-stock risk. These include Vanguard Communication Services ETF VOX, Communication Services Select Sector SPDR Fund XLC, iShares U.S. Telecommunications ETF IYZ and Fidelity MSCI Communication Services Index ETF FCOM.
Deal in Focus
Per the terms of the deal, Charter will pay $21.9 billion in equity and assume approximately $12.6 billion of Cox's debt and obligations. Cox will receive $4 billion in cash, $6 billion in convertible preferred units, and approximately 33.6 million common units, representing about 23% ownership in the combined entity (see: all the Communication Services ETFs here).
The merged company will operate under the Cox Communications name, while the consumer-facing brand will remain Spectrum. The headquarters will be located in Stamford, CT.
Charter operates across 41 states and reaches more than 57 million homes and businesses, while Cox covers 7 million homes in 18 states. The combined company’s network will span approximately 46 states, making it available to nearly 70 million homes and businesses, with 38 million customers. By comparison, Comcast, the largest cable provider in the United States, had roughly 51.4 million customer relationships, which include 17.8 million international customers and were available to nearly 64 million homes and businesses in the United States as of March 31.
The deal with Cox will give Charter an expanded footprint in the South as well as parts of Southern California. The transaction, subject to regulatory approvals and customary closing conditions, is expected to generate approximately $500 million in annualized cost synergies within three years of closing.
The mega deal comes months after Charter announced its intention to acquire Liberty Broadband in an all-stock transaction. The transaction is expected to close concurrently with Charter’s merger with Liberty Broadband, which received shareholder approval from both companies in February.
Analyst Turns Bullish After Deal
Many analysts turned bullish after the mega-merger announcement. Oppenheimer upgraded Charter Communications to Outperform from Market Perform, setting a price target of $500. According to a summary from TheFly.com, an Oppenheimer analyst described the acquisition as a “major positive,” citing expectations for significant share buybacks and reduced capital expenditures, which should boost free cash flow by 2027.
Meanwhile, Pivotal Research raised its price target on Charter to $600 from $540 while maintaining a Buy rating. The firm views the acquisition as being made at a “very attractive valuation” and believes it will likely accelerate Charter’s growth. Pivotal analysts also anticipate no major regulatory hurdles, according to TheFly.com.
ETFs to Tap
Let’s delve into each ETF below:
Vanguard Communication Services ETF (VOX)
Vanguard Communication Services ETF targets the broad communication sector by tracking the MSCI US Investable Market Communication Services 25/50 Index. Holding 116 stocks in its basket, it has key holdings in major telecom and cable firms like Charter and Comcast. Vanguard Communication Services ETF has AUM of $4.5 billion and trades in a good volume of 194,000 shares a day, on average. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Communication Services Select Sector SPDR Fund (XLC)
Communication Services Select Sector SPDR Fund offers exposure to companies from telecommunication services, media, entertainment and interactive media & services and has accumulated $21.5 billion in its asset base. It follows the Communication Services Select Sector Index and holds 23 stocks in its basket, with large positions in companies like Charter and Comcast. Communication Services Select Sector SPDR Fund charges 8 bps in annual fees and trades in an average daily volume of 4 million shares. It has a Zacks ETF Rank #1 (Strong Buy) (read: Meta's Q1 Earnings Beat Lifts Shares: ETFs to Buy).
iShares U.S. Telecommunications ETF (IYZ)
iShares U.S. Telecommunications ETF offers exposure to U.S. companies that provide telephone and Internet products, services and technologies. It follows the Russell 1000 Telecommunications RIC 22.5/45 Capped Index, holding 19 stocks in its basket. Charter and Comcast are among the top 10 positions in the basket. iShares U.S. Telecommunications ETF has an AUM of $399.9 million and charges 40 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Fidelity MSCI Communication Services Index ETF (FCOM)
Fidelity MSCI Communication Services Index ETF follows the MSCI USA IMI Communication Services 25/50 Index. It holds 107 stocks in its basket, with Charter and Comcast occupying decent allocations in the basket. Fidelity MSCI Communication Services Index ETF has amassed $1.5 billion in its asset base and trades in an average daily volume of 153,000 shares. It charges 8 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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