In a sign that he's serious about shedding debt soon, Paul Allen has hired a restructuring adviser to help weigh the options for reorganizing troubled Charter Communications Inc.
Last week, sources confirmed reports that Allen's personal investment company, Vulcan Ventures Inc., hired Miller Buckfire Lewis & Co. as restructuring advisers. Vulcan spokesman Michael Nank declined to comment, but underscored Allen's commitment to cable.
"Mr. Allen is confident that technology — with cable as a central component — will continue to drive innovation and economic growth. Mr. Allen remains committed to Charter, and the potential inherent in its sizable market share and leading edge technology," Nank said.
According to one investment banker who asked not to be named, Allen is trying to work out a deal to reduce debt without giving up control.
Analysts have expected Allen to buy Charter debt at about 30 cents on the dollar and retire it. But that would saddle him with a hefty tax obligation — about $1 billion, some sources figure.
"He hired the adviser because of the tax angle," said one investment banker who asked not to be named.
Allen's $4.5 billion net personal investment in Charter is now worth about $400 million. He's pumped about $7.5 billion into Charter since he acquired it in 1998, but analysts estimate that he's taken about $3 billion in tax credits as Charter's stock plunged in the past year, reducing his net investment to about $4.5 billion.
Miller Buckfire chairman and managing director Henry Miller did not return a phone call seeking comment.
Choked by about $20 billion in debt, Charter has also struggled with heavy subscriber losses and a federal grand jury investigation into some accounting practices. In December, it disclosed that it fired its chief operating officer and chief financial officer.
With an annual cash flow of about $2 billion, most analysts believe Charter is unable to service its debt.
In lowering Charter's debt rating earlier this month, Moody's Investor's Service said the MSO should reduce its debt load by about $5 billion to $6 billion. At its current leverage ratio of 10 times 2002 cash flow, other analysts are calling for more drastic cuts.
A $656m option
"I think they have to cut it [the debt] in half," said the investment banker, who requested anonymity.
Allen could give the company some breathing room by exchanging about $656 million in inter-company loans for equity, which would prevent Charter from violating its loan covenants.
In a research note, UBS Warburg cable debt and equity analyst Aryeh Bourkoff wrote that forgiving the inter-company loans could keep Charter from violating loan covenants until late 2003 or early 2004.
Without that forgiveness, Bourkoff estimated Charter would violate covenants in the first quarter of 2003.
It is becoming apparent that Allen has to do something soon, as the bulk of Charter's debt matures in 2005.
"That's when the crunch comes," said the investment banker, who asked not to be named.
Charter is also in the process of hiring a restructuring adviser. Sources said several companies are in the running, including Lazard Frères & Co. LLC, Morgan Stanley Inc., Goldman Sachs & Co. Inc. and UBS Warburg LLC.
Buying debt isn't Allen's only problem. Bourkoff noted that Allen is obligated to buy 24 million units of another Charter
holding company — CC VIII LLC — as a result of "put" agreements with the former AT&T Broadband (now Comcast Corp.) in April.
That deal could cost Allen an aggregate of $718 million, Bourkoff wrote.