Charter: Up From The Ashes
MSO Emerges From Bankruptcy — Without Paul Allen as Chairman
by Mike Farrell -- Multichannel News, 12/7/2009 2:00:00 AM
After nearly eight months, Charter Communications said last Monday that it has completed its restructuring and has emerged from bankruptcy protection, ending what has been at times an arduous process.
But despite the difficulties — a group of lenders tried to block the approval of the reorganization plan early on, only to be rejected by the court — Charter has risen from the ashes with a much lighter debt load, a history of strong operating performance and the hope that positive momentum will continue to drive the MSO forward.
At the Bank of America Credit Conference in New York last Wednesday, Charter CEO Neil Smit, who guided the St. Louis-based cable operator through one of the roughest periods in its history, sounded both proud and a little relieved.
In a brief presentation at the conference, Smit said the restructuring gives Charter more financial flexibility — it doesn't have to be in the debt markets every quarter looking for refinancing deals — and puts it on the path of consistent free-cash-flow generation. Charter has said the deal will reduce its interest expense by about $830 million.
“More flexibility; that's what drives results,” Smit said at the conference.
While Charter is optimistic about the future, it will have to face it without long time chairman Paul Allen at the helm.
A spokesman for Allen's personal investment vehicle, Vulcan Inc., confirmed that Allen is no longer Charter's chairman nor does he have a seat on the board of directors of the new company. Charter's new chairman is Apollo Management partner Eric Zinterhofer.
Allen will continue to hold the largest voting stake in the company at 35% and retains the right to appoint four of Charter's 11 board members.
“Charter is emerging from this process as a stronger company with a much improved balance sheet that will enable Neil [Smit] and team to continue to deliver the highest quality video, Internet and telephone services to customers over the long-term,” Allen said in a statement. “We look forward to working with our fellow board members to support the success of the business.”
Charter filed for bankruptcy protection on March 27, reaching agreement with the majority of its bondholders on a plan that would shave $8 billion in debt from the company's books and pump about $3 billion of new equity into the company.
In a statement, Charter said that it has successfully emerged from bankruptcy and that it would issue a new stock no earlier than 45 days after emergence. That would put the earliest date for a new stock offering sometime after Jan. 14.
Charter has said it is positioned to generate positive free cash flow through the reduction of more than $830 million in annual interest expense. Charter's outstanding debt now stands at about $13.5 billion, or around 5.5 times projected 2009 cash flow, in line with its publicly traded MSO peers. Prior to the restructuring, its leverage ratio was around 9.4 times cash flow.
But despite dealing with the bankruptcy courts for the bulk of the year, Charter has reported consistent operating results. For the first nine months of the year, revenue has risen about 5% (slightly behind its peers) and cash flow has been up 7% (slightly above its peers).
Smit said that established products like high-speed data continue their upward trajectory and new sources of growth are surfacing, especially in commercial services. Commercial service revenue has been growing at a 15% annual clip, said Smit. He added that businesses spend an estimated $5.8 billion on commercial services within 600 feet of Charter's network, meaning that there is substantial room for growth. Commercial services have generated about $330 million in revenue for the first nine months of the year.
In concert with the restructuring are plans for a new Charter stock, which should hit the market in mid-January. While details on the new stock are few, Charter offered a peek into its plans last week in a filing with the Securities and Exchange Commission, where it appeared to set a maximum proposed price for the shares of $19.37 each.
In an SEC filing Nov. 25 for a new employee stock-ownership plan, Charter said it is authorized to issue as many as 1.17 billion shares in total, including 900 million shares of class-A common stock, 25 million shares of class-B super-voting stock and 250 million shares of preferred stock. In the filing, Charter proposed setting aside about 3.8 million shares of class-A common stock with a maximum offering price of $19.37 per share for employees.
That would be around the price that Charter stock originally traded when it went public in November 1999. Charter's initial public offering was priced at $19 per share, opened at $21.50 per share and the stock climbed as high as $26.31 each in its first week of trading. The stock had fallen on hard times since — its peak in the last five years was $5.69 per share — and it had traded under $1 each in the months leading to Charter's bankruptcy filing on March 27.
Charter received approval for its reorganization plan on Nov. 17. Also last week, a group of lenders and bondholders who had tried to block approval of the plan were rejected in their request for a stay of that approval while they filed an appeal.
U.S. District Court Judge Sidney Stein rejected the motion for a stay, stating that the lenders hadn't shown the necessary possibility of success on appeal, according to a Bloomberg News report.
CHARTER'S OUTLOOK
Financial projections for Charter Communications ($ in millions)
| 2009 | 2010 | 2011 | 2012 | 2013 | |
|
SOURCE: Charter reorganization plan and MCN research. |
|||||
| Revenue | $6,919 | $7,362 | $7,830 | $8,331 | $8,808 |
| Adj. EBITDA | $2,457 | $2,639 | $2,849 | $3,067 | $3,270 |
| Net income (loss) | ($121) | ($57) | $158 | $446 | $769 |
| Long-term debt | $13,460 | $13,390 | $13,320 | $12,150 | $11,280 |
| Leverage ratio | 5.47x | 5.07x | 4.68x | 3.96x | 3.45x |
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