In the world of being a cable and Internet service provider, bigger has proved to be better.
Charter Communications (NASDAQ:CHTR) had a strong 2015 as measured by stock price, beginning the year at $167.23 and closing it at $183.10, according to S&P Capital IQ data. That jump of nearly 10% occurred in part because the company has a pending deal to buy Time Warner Cable (UNKNOWN:TWC.DL) for about $79 million. TWC was also a beneficiary of the pending merger, seeing its stock go from a $153.03 open in 2015 to close at $185.59, according to S&P Capital IQ data, a 21.27% jump.
This was clearly a case of the market's excitement about what would become a cable and Internet giant that could rival Comcast (NASDAQ:CMCSA). Merging the two companies will allow for cutting overhead in areas including billing and customer service. It should also allow for cutting technology expenses while the company continues to invest in its new, larger network.
While these two pending partners saw stock increases last year, one emerging rival, Frontier Communications (NASDAQ:FTR), went in the opposite direction. Its stock fell from a $6.68 open in 2015 to end the year at $4.67, according to S&P Capital IQ data, a drop of just over 30%.
These are three stocks that may show how the cable and Internet business will operate moving forward. It could well become a game where the biggest players crowd out the smaller ones.
How did Charter and TWC gain?
Charter was the beneficiary when the Federal Communications Commission told Comcast it wouldn't approve its attempt to merge with Time Warner Cable. That deal was stopped because of concerns that the merger was not in the public interest. That may be true, but it is widely believed that the FCC will allow Charter to buy TWC.
That makes very little sense, given that in both cases a very large cable company will be created, but there are two key differences here that may explain why the market clearly believes the merger will happen.
First, in allowing Charter to buy TWC, a company will be created that has a very similar profile to Comcast. Whereas the disallowed deal would have created one clear industry leader, the Charter/Time Warner Cable deal will create two.
Second, though the FCC will probably never publicly admit this, it had to at least consider that the public really doesn't like Comcast. The company, which battled numerous public-relations scandals in 2015, came in third-to-last in subscription television and last as an Internet service provider in the 2015 American Customer Satisfaction Index report. TWC was last in pay TV, but it seems unlikely that the FCC will hold that against the merger because Charter will be the lead player in the new company.
Charter itself didn't do much better, coming in third from the bottom as an ISP and sixth from last in pay TV, but this looks like an anybody-but-Comcast scenario. That thinking should get the deal approved, and it should justify the stock price increases both companies experienced last year.
Frontier had a stumble
While the market rewarded TWC and Charter because they are on the verge of getting bigger, it punished Frontier, which expanded greatly in 2015 but made a lot of mistakes along the way. The company essentially entered the year with a hangover from its attempts to integrate the wireline operations it bought from AT&T in Connecticut.
Those efforts resulted in a record number of complaints with Connecticut's Department of Consumer Protection, the state Attorney General's Office, and the state Public Utilities Regulatory Authority, according to The Hartford Courant. PURA received more quality-of-service complaints about Frontier -- 124 in all -- in little more than a month than the combined totals last year of every other cable provider in the state.
By the end of 2015 those issues were largely solved, and the company began trying to grow its new Connecticut operations. But the botched integration didn't help its stock, nor did it give investors much confidence over how the company would handle a major new purchase from Verizon.
That agreement -- which you might think investors would cheer -- will double the size of the company. The $10.54 billion acquisition of wireline, broadband, video operations, and of FiOS networks in California, Florida, and Texas in March, has received final regulatory approval.
On the positive side, while the stock market has punished the still-small company for running up debt while buying customers it may not hold onto, if Frontier learned its lesson in Connecticut, the future could be brighter. Even with the deal, the company is still a relatively minor player, but if it shows it can buy smaller systems and integrate them well -- a big question -- it may bounce because of speculation over the part it could play in ongoing industry consolidation
Daniel Kline has no position in any stocks mentioned. He has Comcast cable and Internet at his office and Frontier in his home and he generally likes both. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.