Charter’s Time of Harvest!
Charter Communications merged with Time Warner Cable and Brighthouse Network in 2016 and this saw the major telecommunications and mass media company investing a lot of money and effort in the integration. The integration is finally coming to wraps and this will result in a rise in cash flow and value increase for major shareholders. That means it’s time to harvest their investments.
So in summary:
- The integration of the mergers with Time Warner Cable and Bright House is almost done.
- Charter invested a lot of money in its cable infrastructure and is now ready to benefit from strong demand for high-speed internet access.
- This growth will lead to strong free cash flows and massive share buybacks.
In his book, “The Outsiders: Eight Unconventional CEOs & Their Radically Rational Blueprint for Success.” William Thorndike describes how John Malone at the start of his career – while he was at McKinsey – got more and more intrigued by the cable television business. Three things in particular caught his attention:
- Highly predictable,
- Utility-like revenues,
- Favorable tax characteristics and
- The fact that it was growing like a weed.
Prudent cable operators could successfully shelter their cash flow from taxes by using debt to build new systems and by aggressively depreciating the costs of construction. These substantial depreciation charges reduced taxable income as did the interest expense on the debt, with the result that well-run cable companies rarely showed net income, and as a result, rarely paid taxes, despite very healthy cash flows.