A key Charter Communications Inc. finance executive has opened the door to a more expansive plan to sell assets, telling investors at a recent industry conference the MSO would consider swapping larger systems for properties that better fit with its existing footprint.
That is a bit of a departure from Charter’s past asset-sale plans — the company had earmarked about 500,000 non-core subscribers for sale more than a year ago and reached deals to sell about 250,000 subscribers for a total of $835 million.
Derek Chang, one of two interim chief financial officers at the country’s fourth-biggest cable company, said at the Morgan Stanley Media & Communications conference in Washington, D.C., on Sept. 9 that Charter continues to seek buyers for the properties. He would not identify them.
TRADES AN OPTION
“We would continue to like to rationalize our portfolio,” Chang said. “We’re not the best clustered company, and if you can get better clusters, the value increases for all of us.”
Chang said Charter would also consider trading larger systems for those that fit better into its 6.1 million-subscriber footprint.
“You may see us go down in size a little bit as we go down that path, but ultimately we will end up with a more cohesive set of assets,” Chang said.
Chang added that Charter’s difficulty in selling off the rest of its nonstrategic systems may have to do with the upcoming auction for Adelphia Communications Corp.
“Adelphia has been a subject for the industry over the last couple of years,” Chang said. “It probably has held up some of the trade activity.”
While Adelphia has likely had an impact, the Charter systems still left on the block have been small properties scattered across the country. With the paucity of cable systems on the market and a glut of deep-pocketed potential buyers, an offer of better-clustered properties could attract more interest and higher prices.
“I think he [Chang] is opening up the door for somebody to say, 'That means a lot more to me than it means to you,’ ” DH Capital principal Joe Duggan said. “And that they will make more intelligent long-term decisions than what I think has been short-term decisions in terms of, 'We aren’t going back to Wall Street at the end of the quarter and telling them that subscribers are down no matter what the reason.’ I think it’s a breath of fresh air.”
Duggan said Charter’s luck in selling the rest of its properties had more to do with a focus on deleveraging its balance sheet.
“There wasn’t a consistent approach to making a leaner, meaner Charter,” Duggan said. “They took advantage then of the opportunity to sell to the private-equity community. Continuing to focus on that is a strategy every MSO should be looking at.”
“We have been advocating that MSOs should sell non-core assets for awhile and focus on increasing the value of their core assets versus being overly concerned with Wall Street’s overemphasis on not losing subscribers,” Duggan added. “We think it adds up to a more valuable Charter, even it means less subscribers. The private-equity community is eager to look at these non-core assets; it’s an excellent window of opportunity for them to get very strong prices and they can take available capital expenditure dollars and focus them where they’re best served for Charter.”
COULD HELP STOCK
Citigroup Smith Barney cable analyst Niraj Gupta said that better clustering would be welcomed by investors.
“Everybody would love to see Charter better-clustered, but nobody knows how to get there,” Gupta said. “To the extent that was a way to do that, end up with less subs and make it more manageable, that would arguably be positive for the equity.”
With roughly $18.4 billion in debt, or about 9.5 times cash flow, Charter is one of the most heavily leveraged cable operators in the industry.
Charter has said that it plans to lower its leverage to about 7 times cash flow in the next 18 to 24 months.
VOGEL ON GROWTH
Charter CEO Carl Vogel, also speaking at the conference, said that while delevering is a top priority, it will be done in conjunction with plans to grow the business.
“You’ve got to have a capital structure that allows us to pursue the business opportunities that allow us to grow the top line,” Vogel said. “Certainly having less leverage is better than having more. And having the leverage we have today has had an impact on our ability to accelerate advanced deployments.”