News

Allen Might Buy Out Charter

8/11/2002 8:00 PM Eastern

Quietly and through a securities filing, Charter Communications Inc. chairman and majority owner Paul Allen last week confirmed that he's considering taking the country's fourth-biggest cable operator private.

Allen had been rumored for weeks to be trying to engineer a buyout of the St. Louis-based MSO, whose stock has declined more than 80 percent since the beginning of the year.

When the Allen-assembled Charter went public in November 1999, it was a cable and financial milestone. The third-biggest initial public offering in U.S. history, the deal raised $3.7 billion.

On its first trading day, it closed at $22.75, up from the initial $19. It also helped pave the way for smaller MSOs Classic Communications Inc. (now in Chapter 11 bankruptcy) and Mediacom Communications Corp. to go public.

Last Thursday, the day the filing was disclosed, Charter closed at $2.90.

Most observers expected Allen to try to buy Charter's publicly traded debt, and then work out a swap for additional equity in the MSO. Allen currently owns about 56.4 percent of Charter's outstanding Class A common stock, and a 92.5 percent voting stake in the company. He also owns all of the Class B shares, which hold 10 times the voting power of the Class A stakes.

Charter executives have deferred media questions about Allen's intentions to the chairman himself, who has declined to comment. Last Tuesday, during the company's second-quarter conference call with investors, Charter CEO Carl Vogel said he had no idea what Allen's intentions are.

"Paul doesn't share that information with me," Vogel said during the call. "I have no knowledge of his intentions. I would encourage him to look at Charter's debt and equity, as all of us have done."

EXECS BUYING

Vogel bought about 50,000 shares of Charter stock on June 21, at prices ranging from $4.45 to $4.65. Vogel also bought $470,000 in bonds. Other executives, including CFO Kent Kalkwarf and executive vice president and chief administrative officer Steve Schumm, made smaller purchases during the month — 6,000 shares and 6,500 shares, respectively.

Allen also bought about 5 million shares of Charter stock for about $20 million in June, boosting his Class A holdings to 18.4 million shares.

According to the most recent filing, he acquired nearly 286,000 additional shares on July 29 — through "put" agreements with third parties — at an equivalent price of $21.45 per share. He owns other shares through his personal investment vehicle, Vulcan Ventures Inc.

Allen also said in the filing that buying Charter debt is another option for him. Allen is "considering possible restructuring transactions designed to reduce [Charter's] leverage," including a debt-for-equity exchange.

The filing also said he might "propose a going private transaction in the future that would result in Mr. Allen acquiring beneficial ownership of all or substantially all of the common stock of [Charter]."

Allen, a co-founder of Microsoft Corp. whose personal worth stands at an estimated $28.4 billion, has not determined what course of action to take and has not made any proposals to Charter, the filing stated.

Charter spokesman Dave Andersen declined to comment, stating that the filing "speaks for itself."

COVENANTS ENTER IN

UBS Warburg cable analyst Aryeh Bourkoff said the filing could be a positive step for Charter, although he did not believe that any deal was imminent.

Bourkoff said he believes it's unlikely that Allen would try to take Charter private, because of bond covenants that would require him to buy out convertible bond holders at high prices.

According to Bourkoff, if Allen were to control 70 percent of Charter's outstanding stock, it would trigger change-of-control covenants requiring him to buy the convertible notes at prices ranging from $21.56 to $26.25 per share. Buying those notes, Bourkoff said, could end up costing Allen another $1.38 billion.

Instead, the more likely scenario is for Allen to buy Charter bonds — currently trading at about 60 cents on the dollar — and later swap them for Charter equity.

"Ultimately, if Paul Allen were to do a transaction, it more likely would be a debt-for-equity exchange, rather than a privatization," Bourkoff said. "If he bought bonds at 60 cents on the dollar, theoretically he could buy about $2 billion of bonds for $1.2 billion, which would be about a multiple of deleveraging. That's still a sizeable transaction."

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