Charter’s Next Move


When Microsoft co-founder Paul Allen jumped headfirst into the cable industry over a decade ago, he believed in the power of connectivity in the “wired world.” But the company he wrought is a distant cry from the smooth running empire he had envisioned.

After rising from the ashes of
bankruptcy, relegating its former
chairman to the sidelines and
losing its CEO to the largest cable
operator in the nation — all in
the past three months — Charter
Communications is at a crucial
point in its 17-year history.

No longer saddled with debt,
the St. Louis-based MSO known
for its strong operating history is
considering three options, according
to analysts and members of the
cable investment community: get
smaller, get bigger or sell out.

Whatever happens to the nation’s
fourth-largest cable operator
— it has about 5 million
subscribers in 27 states —
will be felt by other big cable
operators. Many people
who follow the company
say it will most likely resort
to a combination
of options, selling off
some nonstrategic
systems and swapping
larger systems
to beef up existing clusters.
Up to this point, though,
Charter’s story also offers lessons
about what happens when a company
pays too much for assets and
gets too bogged down by debt.

Charter has been pretty quiet
on the deal front, but with
Paul Allen on the sidelines (he
stepped down as chairman
earlier this year, but remains
the largest single shareholder);
former CEO Neil Smit becoming
president of Comcast Cable
Communications on March 1;
and new owners that appear to
be open to deal-making, that
stance could change. And for
some observers, it is about time.

While the bankruptcy did not
technically create a change in
control — Allen still holds the
largest individual stake — the
infl uence of Charter’s bondholders,
led by Apollo Management,
has increased. That is evident
from the makeup of the MSO’s
nine-member board of directors,
four of whom are representatives
of former bondholders, including
chairman Eric Zinterhofer, a
principal at Apollo Management.
Other bondholders represented
on the board include Oaktree
Capital Management and Columbia

“These are deal guys,” said
one debt analyst that requested
anonymity. “They are all former
bankers and investors who
are going to say, ‘All of those adjacent
properties to Time Warner
that you’ve talked about for years,
how do I cluster them up?’ ”

Some say the driving force behind
the company is not Smit, but
private-equity fund Apollo Management.

For its part, Charter is keeping
its cards close to the vest. In
a statement, interim CEO Mike
Lovett said the company is well
positioned for the future.

Neil Smit leaves Charter in
a good place on many fronts,”
Lovett said in the statement. “We
have enhanced our video, Internet
and phone services and improved
the customer experience.
We achieved strong operating results
throughout a challenging
year, and completed a financial
restructuring that better positions
us for the future.”

Charter emerged from bankruptcy
on Nov. 30, with a streamlined
balance sheet after a group
of bondholders agreed to swap a
chunk of the debt owned them
for equity in the new company.
As part of the deal, bondholders
like Apollo, Oaktree and others
exchanged about $8 billion of
their debt for stock and pledged
to pump another $3 billion in equity
in a new Charter.

The bankruptcy reorganization
reduced Charter’s leverage ratio
dramatically from more than
10 times cash flow. The MSO is
carrying about $13 billion in
long-term debt, or about 5.2
times cash flow. That compares
to about 6.3 times for Mediacom
Communications, around 3.25
times for Time Warner Cable and
about 2.5 times for Comcast.

Charter is currently split into
two geographic divisions — the
East and West regions — each
with about 2.5 million subscribers.
Its largest clusters include:
Alabama and Georgia (609,100
customers); Michigan (592,100
subscribers); Wisconsin (507,500
customers); Louisiana/Tennessee (533,400 subscribers) and Central
States (543,200 customers).

Rounding out the group are
Southern California (mostly the
Los Angeles area, with about
376,800 customers); Texas (with
159,300 customers) and Northwest
(including parts of southern Washington
state and Northern Oregon
(248,500 customers), which are all
also likely fodder for deals.

“We have thought it made
sense that various Charter systems
be sold, not necessarily the
whole company,” said Collins
Stewart media analyst Tom Eagan.
“There are definitely markets
or systems that make sense for either
Comcast or for Time Warner
Cable to buy.”

Southern California has been
speculated as a Time Warner Cable
target ever since that MSO
gained 1.1 million Los Angeles
customers through its joint purchase
of Adelphia Communications
with Comcast in 2006. In
Texas, where Charter has about
159,000 customers in Fort Worth
and outlying areas around the
state, Time Warner Cable (Dallas)
and Comcast (Houston) could be
potential suitors.

Charter’s Alabama/Georgia
cluster is also near Comcast’s Atlanta
systems, which have about
600,000 customers, and its Louisiana/
Tennessee cluster borders
Cox- and Comcast-owned systems.
Charter’s North Carolina/
South Carolina/Virginia cluster,
with 516,400 customers, is also
near properties owned by Time
Warner Cable and Comcast.

Aside from those larger deals,
Charter is rife with smaller systems
that could fit in with other
operators either as outright sales
or as swap fodder. Included in
that list are several properties
within spitting distance of Comcast
clusters, including Reno
and Carson City, Nev.; Vancouver
and Pasco, Wash.; Medford
and Lincoln City, Ore.; and
Benton, Minn. Charter’s New
England cluster, which includes
Massachusetts, New York, Vermont,
Connecticut and Rhode
Island, is close to Time Warner,
Cox and Comcast properties,

Another possibility: Concentrating
on the Minnesota,
Michigan and Wisconsin, Alabama/
Georgia and St. Louis (Central
States) markets — which have
about 2.6 million customers combined
— and selling or swapping
the rest.

That could mean that Charter
could trade systems in markets
considered more strategic
to Comcast and Time Warner for
properties both hold in those areas
(such as Minneapolis, Detroit
and Milwaukee).

Moody’s Investors Service senior
vice president Russell Solomon
and others stressed that
deals would hinge on several
factors, including price, availability
of financing, how the
systems fit into the buyer’s operations
and the number of willing

“The board composition does
suggest that they are going to
try to maximize the value that
they received in the bankruptcy
process,” Solomon said. “To
the extent that driving toward
a smaller company that is more
tightly clustered in markets they
can focus on does that, I’m sure
that the direction they would
head. But they might just as easily
look to get bigger.”

Growing larger through acquisitions
becomes more of a
possibility as Charter comes
nearer to issuing new stock — it
has been trading on a when-issued
basis since Dec. 2, at between
$29.10 and $39.50 per
share — which could be used as
a deal currency.

But that will hinge on the price
at which the stock ultimately
trades. When-issued prices are a
benchmark, but can vary widely
from the regular trading price.
And cable stocks already trade at
a wide variety, with Mediacom,
the smallest publicly traded operator,
at between $4 and $5. In contrast,
Time Warner Cable trades
in the $40-per-share range.

“If it trades like it’s Mediacom
on the basis of the per-sub valuation,
then I think you really
have to do something to unlock
some value,” said Wunderlich
Securities media analyst Matt
Harrigan. Harrigan does not
currently cover Charter, but has
in the past.

Smaller operators like Mediacom
Communications, which
has about 1.3 million subscribers
in the Midwest, and Suddenlink
Communications, with 1.2 million
customers, could be potential
acquisition targets, although
neither company has expressed
any interest in selling.

Charter also could focus on
growing organically, without going
on a buying spree. Although
it had been saddled by debt in
the past, Charter has always
been a strong operator. With its
debt considerably lower — it is
about 5.2 times leveraged, compared
to around 10 times before
the reorganization — it should
be able to begin generating free
cash flow on a similar pace to its

Interim CEO Lovett has been
running day-to-day operations
since 2005 and has a strong
track record. Since 2005, Charter
has grown revenue from $5.3
billion to $6.8 billion in 2009
and adjusted cash f low from
$1.8 billion in 2005 to $2.5 billion
in 2009.

“Today, Charter is a stronger
company and we stand on a
foundation that is solid,” Lovett
said last week. “Every one of us at
Charter is determined and dedicated
to providing our customers
with excellent service and great
new products.”