Charter Addresses Analyst's Sub Questions


A little less than a week after an influential analyst called some of its accounting methods into question, Charter Communications Inc. fired back, stressing that its accounting methods are sound during its annual shareholders meeting July 23.

Last Friday, Merrill Lynch & Co. analyst Jessica Reif Cohen downgraded her rating on Charter stock from "strong buy" to "neutral," citing concerns over the way the St. Louis-based MSO counts its basic-cable subscribers.

In a report, Cohen said Charter counts some cable-modem customers as basic video subscribers. She also took issue with the way Charter accounted for about $100 million in launch fees.

While other MSOs apply those fees against their continuing costs, Charter includes the fees as separate advertising revenue.


At the annual meeting in Bellevue, Wash., Charter CEO Carl Vogel didn't name names, but was clearly responding to Cohen's less-than-favorable report.

"I'm able to report with confidence that our systems of reporting our financial results, and the required independent audit and board oversight are, in fact, working," Vogel said. "Simply put, we believe the numbers we report to you in our financial statements are correct in all material respects, and a proper reflection of the economics of our company."

Charter's accounting methods not only comply with generally accepted accounting principles, Vogel added, but are designed to give investors a transparent picture of the company's finances.

He hinted that even further transparency is anticipated when the company announces its second-quarter results, scheduled for Aug. 6.

"We fully recognize that the restoration of confidence in all public companies will take time, and likely increase disclosure, which we expect to provide in connection with our second quarter 10Q and earnings call scheduled for Aug. 6," Vogel said. "From this expanded information, the investment community can make their own decisions, a process that we are comfortable with and a willing participant."

But Charter's stock has been in the dumper for months. Shares are down 84 percent since the beginning of the year, largely because of investor concerns regarding the company's high debt load.


While Vogel said Charter is bent on bringing down leverage, he added that the right track is to continue to deliver new services.

"We are all extremely disappointed in the stock price," Vogel said. "We're trading at 6.2 times cash flow, or $2,100 per subscriber. That's a significant discount."

Capital once spent to acquire systems will now be focused on products and services that will deliver revenue growth, Vogel added.

"Those of you that have participated in Charter's journey over the past several years know that we have spent much of our energy and much of our capital to acquire critical mass," Vogel said. "That effort is now largely complete, and our profile today is not one of an acquisition company, but of an operating company."

That seemed to jibe with reports that the MSO had put 600,000 subscribers in several rural states on the block, hoping to raise about $1.9 billion.

Charter would not confirm the number of subscribers or the asking price, but sources inside the industry said they were mainly small and medium-sized systems located in Utah, Arizona, Colorado, Kansas, Nebraska, New Mexico, Oklahoma, Texas and Nevada. Sources said Charter is seeking prices in the range of $3,000 to $3,200 per subscriber.

"We have publicly expressed a consideration to divest of certain nonstrategic assets this past May," said Charter spokesman Dave Andersen. "The actions being considered to improve our balance sheet are decreasing leverage and increasing liquidity.

"If nothing comes to fruition on these, we just won't do anything. We are fully funded through 2004. We are under no pressure to divest of any assets."


Charter isn't the only MSO with nonstrategic systems to sell, though. Aside from any systems that come on the block after the AT&T Broadband merger with Comcast — or any sold by bankrupt Adelphia Communications Corp. — Shaw Communications Inc. and RCN Corp. also have cable properties to sell.

Canadian MSO Shaw put some Florida and Texas systems it inherited as part of its acquisition of Moffat Communications Inc. on the block in April. And overbuilder RCN Corp., which received bids as high as $3,600 per subscriber for its incumbent systems in the Princeton, N.J., area, is holding out for a higher price, according to several sources.

The Charter systems are in the same boat. AT&T Broadband and Comcast are unlikely candidates, because they are focusing on completing their merger, expected to close later this year. AOL Time Warner Inc., the second largest MSO in the country, is in the middle of a major management upheaval and also has a heavy debt load, which makes it an unlikely buyer as well.

That leaves private-equity firms, which have expressed an interest in getting back into cable.

"That's what they [Charter] are hoping for," said one member of the financial community who asked not to be named. "But the systems need a lot of work. It's not going to be easy to get the price they want."


Vogel added that he believes in Charter's growth potential, and said he's put up his own money to back that up. He said he has spent about $750,000 on Charter common stock and convertible bonds, more than he has drawn in salary from the company in the past 10 months since he became CEO.

He also smarted at shareholders who suggested during the meeting that Charter executives were giving themselves hefty raises. Charter executives have been asked to do a lot more in the past 10 months, Vogel said, and their pay is about in the middle of their peer group.

"With respect to me personally, I'm being paid less than my predecessor [former CEO Jerald Kent]," Vogel said. "And I think you're getting a hell of a lot more value."