Cable Operators

Lovett’s In: What’s Next?

4/19/2010 3:01 PM Eastern

Charter Communications’ two-month search
for a new CEO is over, with former chief operating officer
Mike Lovett replacing Neil Smit, who left in March to become
president of Comcast Cable Communications.

Now, the fourth-biggest U.S. cable operator (5 million
customers) — controlled by bondholders since emerging
from Chapter 11 reorganization in November — can focus
on operations and, analysts believe, strategic asset sales
and swaps. It’s believed that Charter’s new owners may be
more inclined to make deals that better cluster the operations
and extract value through sales.

Collins Stewart media analyst Tom Eagan called Lovett
the natural choice for CEO and said the company can focus
on rationalizing its footprint. He and other analysts
think Charter could shed some properties near bigger operators
like Comcast and Time Warner Cable over the next
18 months through swaps or sales.

“We would not be surprised if Time Warner Cable acquires
some of their adjacent systems,” Eagan said.

Charter has not addressed such speculation.

In a statement, chairman Eric Zinterhofer said of Lovett:
“Mike has sound strategic vision, strong operational skills
and a commitment to leading Charter in delivering an exceptional
experience to its customers, making him clearly
the best candidate for this position.”

Lovett said the focus now will be on operations. “We are
committed to delivering the most robust high-speed Internet,
video, and phone solutions to both consumers and
businesses and I see tremendous opportunity for Charter
to build on our strong foundation to meet our customers’
evolving needs and exceed their expectations,” he said in
a statement. “With a stronger balance sheet and solid operations,
we are well-positioned to capture that opportunity.”

With Smit, Lovett helped steer Charter through bankruptcy
proceedings that eliminated about $8 billion in
debt and pumped in $3 billion in new equity.

Lovett, with Charter since 2003, has been credited with
keeping the business humming as it wound through bankruptcy.
Charter’s performed on par with its peers despite
completing a lengthy and complicated restructuring.

Since Lovett became COO in 2005, Charter’s annual
revenue has grown to $6.8 billion from $5.3 billion and
adjusted cash flow rose to $2.5 billion in 2009 from $1.8
billion in 2005.

Charter’s preliminary first-quarter results came out last
week, too, and revenue of about $1.7 billion was a 4.5% gain
from the same period a year ago.

Basic video customers declined by 23,400 (in line with
last year), offset by better-than-expected gains in digital
and high-speed data customers. Charter added 66,900
phone customers, versus 70,400 adds in the year-ago period.
Full financial and operating results for the quarter
are expected on May 6.

Lovett also got a new employment agreement. According
to securities filings on April 13, his contract extends
to 2013 and includes a $1.3 million base salary, a performance
bonus of up to 165% of that base salary (provided
he meets certain targets), a $2.21 million retention bonus
and 215,000 shares of company stock through its long-term
incentive compensation program.

According to Charter’s 10-K annual report filed in February,
Lovett received total compensation of $10 million, including
a $757,178 base salary, $5.4 million in stock awards
and $3.8 million in non-equity incentives in 2009.

Charter also said chief financial officer Eloise
Schmitz will leave the company when her contract
expires in July. The CFO since 2008, Schmitz
has been with Charter in various finance roles since
1998 and will remain on an interim basis to facilitate a
smooth transition while a search is conducted.

“Eloise was part of the team that built this company,
and we greatly appreciate her leadership over the past 12
years,” Lovett said.

Over the years, Schmitz has been one of the main architects
behind Charter’s refinancing strategy — an ongoing
effort. Last week (April 14) Charter said it made
a cash tender offer for about $1.6 billion in senior debt
which it plans to finance it by issuing senior notes in the
same amount.

The tender offer will retire $800 million in 8.75% senior
notes due 2013 and $770 million in 8.375% senior second
lien notes due 2014 and replace them with new debt with
maturities ranging from 2018 to 2020.

FIRST LOOK AT Q1
Charter released preliminary first
quarter results last week, including
these operating metrics:

 Revenue: $1.7 billion (up 4.5%) 
 Basic subscriber losses: 23,400
 Digital sub gains: 95,800
 High-speed data gains: 103,700
 Phone gains: 66,900
 Capex: $310 million
 SOURCE: Charter Communications
September