Charter's Loss


Charter Communications Inc. received a crash course in the value of a top cable CEO last week, when it watched the bottom fall out of its stock price after chief executive Jerald Kent resigned.

Monday — the day when Charter released a statement that said Kent wouldn't renew his employment contract — was a bad day for Charter shareholders. The St. Louis-based MSO's stock price fell 20 percent, or $3.19, to $12.81 by day's end.

By Thursday the price had firmed up, closing at $12, down one cent. But by then, Charter had lost more than $1 billion in market value, falling to about $3.1 billion.

That fall might enhance the bargaining position of Liberty Satellite & Technology Inc. president Carl Vogel, whom many cable executives called the leading candidate to replace Kent.

Sources familiar with the matter said Vogel — whose last cable-operations job, at AT&T Broadband in 1999, lasted about five months — was still talking to Charter about the CEO job late last week.

Vogel also had operating roles at two direct-broadcast satellite operators: EchoStar Communications Corp. (1994 to 1997) and MSO-backed PrimeStar Inc., before it sold out to DirecTV Inc. in 1999. Prior to that, he was an executive at MSO Jones Intercable Inc.

Vogel is experienced and has a good reputation on Wall Street, but last week some analysts questioned whether he'd have an immediate impact.

Vogel "had a good reputation at EchoStar, but then he got involved in a lot of TCI-related [Tele-Communications Inc.] problems," said one debt analyst who asked not to be named. "PrimeStar, that was a bust. He ended up doing a lot of [Liberty chairman] John Malone's tough work. I don't know if the past few years point to any successes or failures."

One such cleanup task done on Malone's behalf was a brief stint as CEO of Liberty-backed telecommunications firm ICG Communications Inc. this past spring.

A cable source close to Allen agreed that Vogel looked like the leading contender, but said Allen had a "short list" with about five names on it.

The source said Allen might choose more than one executive to replace Kent, and that Allen wants to retain other senior managers, including the two men who replaced Kent on an interim basis: COO David Barford and CFO Kent Kalkwarf. "It might not be a traditional structure," the source said.

Others on the short list: Larry Wangberg, chairman of Allen-owned cable network TechTV; Maggie Bellville, CEO of Internet-infrastructure firm Incanta Inc. and former executive vice president of operations at Cox Communications Inc.; and two cable-programming executives whom the source would not name. Wangberg did not return a call last week.

Bellville said last week that someone outside of Charter management contacted her to weigh her interest in joining the company, but added that she believed Vogel was the front-runner for the position.

Bellville, who said she remains committed to Incanta, said a Charter job offer would be a long shot, but she would consider it if it came.

"Charter is in a perfect position to lead," she said. "I'm sorry to see Jerry [Kent] go; he was a wonderful inspiration for me with the stand he took on some very difficult issues. Somebody needs to pick that up and continue that vocalization because we need to be out front with the issues facing our industry."


Kent said he wasn't riding any ego high over the market's reaction to his departure. "I take no satisfaction from the stock price suffering over my leaving," he said. "There is still a great team at Charter."

Charter has been on the decline for the past two weeks; its stock price has dipped 41 percent since Sept. 10. Most cable stocks suffered after the Sept. 11 terrorist attacks, but some cable executives speculated that rumors of Kent's unhappiness played a part in Charter's decline.

"The rumor was certainly out there," one MSO senior executive who asked not to be named said last week. "When it finally broke, most of us were like, 'Now that's finally over with.' "

Charter has grown quickly since Allen bought the company in 1998. The Microsoft Corp. co-founder combined it with his first cable buy, Dallas-based Marcus Cable, and installed Kent and other St. Louis-based Charter senior managers at the helm.

Allen then went on a buying spree, making more than a dozen cable acquisitions for about $12 billion and enlarging Charter's customer base to 6.4 million from the initial 1.3 million.

With all that, Allen remains the country's third-richest man, according to Forbes
magazine, which estimated his personal wealth at about $28.2 billion.

Kent helped Allen's fortunes by steering Charter to a $3.7 billion initial public offering in November 1999, the third-biggest IPO in U.S. history to that point.

Under Kent, Charter consistently turned in strong cash-flow growth — up an average 17 percent per quarter over the last six quarters — and kept basic subscriber growth up around 2 percent, nearly a full percentage point above its peers.

Kent focused much of the company's energy into digital cable. In the last year, Charter went from 155,400 digital cable customers to 1.6 million as of June 30.

Charter's high-speed data customer count rose to 419,400 from 84,400 over that span.

"He's going to be a tough act to follow," Insight Communications Co. chief operating officer Kim Kelly said. "Jerry did an excellent job."

Kent also selectively spoke out on key issues, mostly those related to rising sports programming costs.

This past spring, Charter pulled ESPNews from many systems over a disagreement about the network's right to offer live programming over the Internet. Charter's take was that the sports news outlet shouldn't offer Web users free access to the same programming that cable subscribers were paying for.


Shortly before that, Kent loudly complained about ESPN, another sports network owned by The Walt Disney Co., and its annual 20 percent license fee increases.

During the National Show in Chicago this spring, Kent proclaimed that cable operators should be able to offer sports networks à la carte, regardless of contractual requirements, so the entire basic-cable customer base wouldn't have to swallow sports-related rate hikes.

Sports networks show games by leagues that enjoy antitrust-law exemptions, so Congress should think about passing legislation to give operators that à la carte packaging option, Kent said.

During a CEO panel discussion at the show, Kent remarked that two things generally were on his mind when he had trouble sleeping: "One is my kids. The other is sports-programming costs."

Last week, Kent said, "There are probably a lot of guys on the West Coast that are jumping for joy." Disney is based in Burbank, Calif.

While some cable analysts called Kent's departure a blow, they continued to tout Charter's prospects.

"We expect Charter to lead the sector with new service installs," UBS Warburg LLC cable analyst Tom Eagan wrote in a research note. Eagan raised his stock rating on Charter to "strong buy," from "buy." He said he felt Charter's stock price decline "more than offsets" the risk raised by Kent's departure.

But Goldman Sachs & Co. cable analyst Richard Greenfield downgraded Charter from the recommended list to "market outperform."

Greenfield wrote that there was a concern that other Charter executives might follow Kent out the door. Because of the executive-suite uncertainty and the slowing economy, Greenfield said he expects Charter's third-quarter cash-flow growth to be at the low end of company forecasts — 12 percent to 14 percent growth.


In an interview, Kent said he decided to leave because he and Allen could not agree on how to run the company.

"Paul and I just didn't see eye to eye on a lot of different things," Kent said. "It wasn't working for me, and frankly it wasn't working well for the company going forward. So, for the best interest of myself and my family and for the company, it was decided it was better for me to move on."

His employment agreement with Charter expired on Dec. 23, and would have been automatically renewed had he not given Charter 90 days' notice of his intentions. That made Sept. 24 Kent's day of decision.

Kent wouldn't give specifics on what he and Allen disagreed on, but he said nothing recently brought the situation to a boil.

"It's been going on for a long
time," Kent said. "I've tried to buffer my people; I've tried to buffer all shareholders from the friction between Paul and I. Maybe that's why it was a surprise, but I was trying to make it work. I didn't want it to affect my people nor our public stockholders. But it just got to the point where because of that it just became really, really stressful for me."

Kent also denied that Allen's $1.65 billion personal investment in cable overbuilder RCN Corp. in October 1999 drove a wedge between the two executives. The deal didn't directly affect Charter, but Kent was forced to respond to questions about it by cable operators who weren't pleased about an MSO owner pumping cash into a key rival.

"I'll give Paul credit, they checked with me to make sure I wouldn't be totally upset before they invested in RCN," Kent said last week.

There was much talk among analysts last week that Allen wanted to buy RCN outright, and Kent opposed such a move. Kent denied that speculation, and in a statement issued last Tuesday directly addressing that situation, Charter said it is not involved in any imminent mergers or acquisitions aside from a previously announced offer to buy Charter-related assets from high-speed data service provider High Speed Access Corp. for about $73 million. HSA is still considering the offer.

"There has been no dialogue with RCN, nor is any planned. The source of this speculation is unknown to us," Kalkwarf said in the statement.


Kent also dismissed speculation that he and Allen feuded over possible involvement in a purchase of or investment in AT&T Broadband, or that Kent himself might emerge as the head of AT&T's cable unit.

"The timing of this is purely coincidental," Kent said.

While some analysts privately criticized Charter for the way it handled Kent's resignation — it issued a rather terse press release and held no conference call with top management — the soon-to-be-former CEO said he and Kalkwarf have been fielding calls from investors.

"I've tried to explain it to them," he said. "I've tried to do everything I can. The company is in great shape with a good management team."

Charter spokesman Dave Andersen said Barford and Kalkwarf would report to an "executive committee" that consists of Allen and Charter director William Savoy.

Savoy is also president of Vulcan Ventures Inc., Allen's personal investment vehicle.

Charter declined to comment on a potential replacement for Kent, saying the search for a new CEO was continuing.