Charter Weighs Options


After nearly two years, the Securities and Exchange Commission investigation into Charter Communications Inc.’s accounting practices is over, with the St. Louis MSO emerging virtually unscathed — and perhaps primed to issue equity now that a major overhang has been lifted from its stock.

Charter said last Wednesday that it received no fine from the agency, but as part of the settlement agreed to an administrative order prohibiting the MSO from any future violations of U.S. securities laws.

In the Settlement Agreement and Cease and Desist Order, Charter neither admitted nor denied any wrongdoing.

“We are very pleased to put this issue from the past behind us,” said Charter CEO Carl Vogel. “We are a new company, and bringing this issue to closure allows us to focus on serving our customers.”

The 20-month SEC investigation centered on how Charter counts subscribers, various accounting practices and procedures concerning capitalization of certain expenses and its dealings with certain vendors, including programmers and digital set-top terminal suppliers.

Charter had cooperated with the SEC throughout the investigation and had conducted its own internal probe into the matter before and during the SEC’s involvement.

In July 2003, four former Charter executives were indicted by a federal grand jury as part of an investigation into certain business practices. Charter also cooperated with the Department of Justice in its investigation.


The conclusion of the SEC investigation could prompt Charter to initiate an equity offering, according to one analyst.

In a research report, UBS Warburg cable debt and equity analyst Aryeh Bourkoff said Charter could file a shelf registration with the SEC for an equity offering soon.

“We believe that previously the unconcluded investigation could explain in part why the company has not been more active in the capital markets in pursuing an equity-linked offering to deleverage,” Bourkoff wrote. “With the conclusion of the SEC investigation, we expect that Charter could pursue exchanges of debt for equity that include parts of the capital structure other than the converts.”

At its annual shareholders meeting in Seattle last Tuesday, Vogel said deleveraging would be a top priority and Charter has three options: using its stock to acquire other systems with lower debt, issuing equity or exchanging convertible debt for equity.

Vogel said that process would not take place overnight — it is more like an 18-month to 24-month process. However, in response to a shareholder question, Vogel said that a leverage target of 7 times annualized cash flow (Charter is currently levered at about 9.8 times annualized cash flow) would be a good goal to reach.

Oppenheimer & Co. cable analyst Tom Eagan said it’s likely Charter would do a combination of all three scenarios to pare down debt and added a fourth option: selling off some of its own systems.

Charter sold non-strategic systems with about 250,000 subscribers last year for about $835 million. The company has identified another 250,000 non-strategic subscribers it could sell, but so far has not announced any deals.

While Charter’s debt-reduction strategy means it is an unlikely buyer of all of Adelphia Communications Corp., Eagan added, it could buy select systems. But that, too, would present some problems.

“Like most operators in the space, they would like to buy certain systems, not the whole thing,” Eagan said. “But the problem there is that the [Adelphia] systems don’t line up with the debt. You can’t just buy the Los Angeles system because the debt is linked up to other systems.”


Vogel also praised Charter’s progress in rolling out and selling advanced services. He said during his presentation that as of June 30, Charter had about 30,000 digital video recorder customers in a limited rollout. The MSO expects 1% of its digital customer base to buy DVR service each month going forward, he said.

HDTV service also is catching on — Vogel said that the company had about 60,000 HDTV subscribers in June.

Charter also plans on rolling out one additional market for its voice-over-Internet-protocol telephone service by the end of the year. The service is currently available in three markets: St. Louis; Madison, Wis.; and Wausau, Wis. Vogel said that by the end of this year, VoIP service should be available to about 1 million homes passed.