Charter's Chairman Mulls Private Path

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Charter Communications' chairman and largest individual shareholder, Paul Allen, revealed in a federal filing last Wednesday that he is mulling several options for the St. Louis-based cable company, including taking it private.

In a Securities and Exchange Commission filing Aug. 15, Allen — who owns 52% of Charter's equity and 91% of its voting shares — said that he may consider, among other options, a going-private transaction where he would end up owning all or substantially all of Charter's outstanding shares. In the filing, Allen also said he would consider a recapitalization or restructuring of the company, a merger, a reorganization or a sale of material assets.

Allen, who has pumped about $7 billion of his own money into Charter since acquiring the cable operator in 1998, has seen his investment dwindle over the years. Charter went public in 1999 at $20 per share, but the stock has fallen off substantially since then. Charter shares were trading at $2.57 each on Wednesday.

This isn't the first time Allen has said that he could take the cable operator private. In 2002, in a similarly-worded filing, Allen stated that he was further considering transactions designed to reduce Charter's leverage, including a debt-for-equity exchange, or a going-private transaction where he would control all of the company's shares. Despite much speculation that Allen would at least propose a debt-for-equity swap, the chairman took no action at all.

But what appears to be different this time is that Allen has made other recent moves to increase his liquidity. He was an early investor in DreamWorks SKG, the movie studio owned by Steven Spielberg, Jeffrey Katzenberg and David Geffen, which split off its animation unit into a separate publicly traded entity in 2004 partly to provide Allen with some liquidity. Allen said earlier this month that he would reduce his stake in the company and give up his seat on the board of directors.

Also this month, Charter announced a shareholders' rights plan that limits an individual from owning more than 5% of its outstanding shares without approval from the board of directors. And there is speculation that cable network Oxygen is shopping around for a buyer, possibly NBC Universal. Allen is an investor in the channel.

Analysts and investors took the latest news in stride. Charter stock continued to drop last week, closing down 3 cents at $2.57 on Aug. 15; and falling another 16 cents to $2.41 the next day, despite the privatization talk. That is a possible sign that investors are not taking the chatter that seriously.

In an Aug. 16 research note, Miller Tabak analyst David Joyce reminded investors “some of the filing language that raised flags in the market yesterday is reworded, but still typical language that the chairman has included for years.”

Buying out Charter wouldn't be that expensive. With roughly 400 million shares outstanding, Allen could offer a 50% premium to the stock price and spend just $1.5 billion for the remaining shares of the company he doesn't already own.

But paying a premium for the stock is not the main hurdle to a privatization of Charter — its $19.6 billion debt load is.

Whether Allen would want to take on personal responsibility for that debt, or whether he could find a way to refinance the bulk of it, remains to be seen. Investors and analysts for years have said that Allen could solve many of Charter's problems by swapping a substantial amount of that debt for equity. That is something that so far he has been unwilling to do.

Charter has made significant inroads in turning around the company over the past two years. The company brought in former AOL executive Neil Smit as CEO in 2005, restructured the management team and rolled out voice service. In the second quarter, Charter reported double-digit revenue and cash-flow growth for a third period in a row, but lost about 29,000 basic subscribers. However, the cable operator added 128,000 telephone customers in the quarter, double its telephony additions in the prior year.

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