Just hours after announcing that Charter Communications Inc.’s basic-subscriber rolls would fall by 55,000-60,000 in the third quarter, CEO Carl Vogel told a group of investors late Thursday that he would consider selling the MSO’s Los Angeles operations.
Saddled with the highest debt-to-cash-flow ratio in the industry -- at about 10 times cash flow -- Charter has sold about 250,000 subscribers in nonstrategic markets to help pay down debt.
But at the Deutsche Bank 2004 Global High Yield Conference in Scottsdale, Ariz., Thursday night, Vogel and co-chief financial officer Derek Chang said selling Los Angeles is not out of the question.
Los Angeles is Charter’s second-largest individual market, with about 500,000 subscribers -- St. Louis is No. 1 -- and it is also one of the most fragmented major metro areas in the country. Comcast Corp., Time Warner Cable, Cox Communications Inc. and Adelphia Communications Corp. all own properties in the market.
Asked by a conference attendee if Charter would consider selling Los Angeles, Chang replied, “Absolutely: At this point, the company has to consider what options are in front of it to help improve its position. If there is a transaction -- either through a sale or a joint venture or anything like that -- that potentially helps put us in a better position, I think we have to evaluate it pretty seriously.”
Chang added that Los Angeles’ cash-flow characteristics aren’t necessarily better than those of Charter’s suburban markets.
“There are counterbalancing measures with respect to having a predominately metro market, as opposed to something that is more of a suburban market, that will impact your various cash-flow characteristics,” Chang said. “From a strategic-value standpoint, L.A. probably carries a little bit more value.”
Vogel added that the Los Angeles market (including Malibu and Pasadena, Calif.) has strong revenue streams and population densities, and customers buy a large amount of advanced services. However, all opportunities will be evaluated.
The revelation appears to fly in the face of speculation that Charter chairman Paul Allen has long desired to consolidate the Los Angeles market for himself. Charter had looked at purchasing Adelphia’s Los Angeles properties in 2002 -- when that MSO attempted to sell off some strategic systems before ultimately deciding to file bankruptcy later that year -- but the two companies couldn’t agree on a price.
Perhaps the change of heart has something to do with the price a Los Angeles sale could bring. Some analysts have valued Adelphia’s Los Angeles systems at as high as $4,300 per subscriber. At that valuation, Charter could attract almost $2 billion in a sale, which would retire a substantial chunk of its $18 billion in debt.