A Classic Return

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Joining a parade of ex-MSO chieftains who've sensed that cable prices have bottomed, former Charter Communications Inc. CEO Jerry Kent said last week his Cequel III investment vehicle has agreed to help fund and manage Classic Communications Inc.

His return is no surprise: It's been expected for months. Some industry observers had figured he'd lay low while Charter sorts through a federal grand jury investigation over subscriber-counting and accounting practices.

But Kent, who left Charter months before the grand jury started work, stressed he is not being investigated and hasn't been accused of any wrongdoing. "I can assure you that all of our partners who we've known over the years have done substantial due diligence to make sure there is no issue, and have obviously gotten comfortable," he said.

Bottom line: "Laying low, that's not in my nature."

"It's fun to be back in the business," Kent added. "I'm looking forward to seeing a lot of my friends around the industry."

Other MSO executives returned the compliment.

"I think it's terrific that the entrepreneurial roots of this industry are re-emerging, with Jerry coming back in and Bill Bresnan," Insight Communications Co. CEO Michael Willner said. "I think that is a terrific advantage in helping us communicate the very positive message we have to deliver."

No terms disclosed

Kent and his privately owned Cequel wouldn't disclose how much they're investing in Classic or how much equity they'd receive. Oaktree Capital Management retains the majority of Classic equity.

After enjoying life at the top for eight years with Charter — which he helped expand to 6.7 million customers, powered by Microsoft Corp. cofounder Paul Allen's wallet — Kent is embarking on a different challenge at Classic.

Charter was the fourth-biggest U.S. MSO (it is now No. 3) and an industry leader in cash-flow and subscriber growth when he resigned in Sept. 2001.

Classic, his new shop, ranks No. 12 on the MSO list, is only a month removed bankruptcy and faces severe subscriber erosion due to competition from satellite providers.

Some things will be familiar, though. When Kent takes the CEO reins at Classic, its headquarters will shift from Tyler, Texas, to St. Louis. And Cequel has already hired several ex-Charter executives, including former programming negotiator Patty McCaskill.

Current Classic CEO Dale Bennett joins Cequel as vice president of operations, but he reports to senior vice president of operations William Shreffler, an ex-Charter hand. Kent said Cequel might hire other former Classic executives and said Bennett will play a key role in growing the company.

In November 2001, when Classic filed for Chapter 11 bankruptcy protection, it listed $711.3 million in assets and $641.8 million in liabilities.

When it went public in 1999 (it's privately owned now), Classic targeted rural and secondary markets it believed were missing out on the proliferation of digital and broadband services.

Classic's ability to get those services to customers was hamstrung by the high cost of upgrading the systems and the heavy debt it accumulated from making acquisitions at a time when prices were high.

In November, Classic reported cumulative revenue of $176.5 million and a cumulative net loss before restructuring items of $190.4 million.

Subscribers dipped from 350,000 a year ago to 325,000 at present.

Kent, acknowledging past Classic missteps, declared the time was right to tackle rural markets.

"Classic had several issues. Probably the most important was they had a balance sheet that didn't match the business," he said in an interview.

"Emerging from bankruptcy they've purged a lot of debt — they're [leveraged] well under four times cash flow. The balance sheet is now aligned with the business. The properties are spread out, we plan on rationalizing the systems."

Along with purging some smaller, less profitable systems, Cequel plans to acquire adjacent "mom-and-pop" systems and buy others in bigger markets.

"We plan on buying other properties in suburban and metropolitan markets that will end up with a nice blend and balance between rural and more densely populated areas."

Kent would not elaborate on where he's looking, but said Cequel is being very active.

Cequel has been said to be among the parties interested in buying Shaw Communications Inc.'s cable properties outside of Houston, as well as those of Alliance Communications in West Virginia, Ohio, Pennsylvania, Illinois, Indiana and southeast Missouri.

Kent said he's been speaking to Classic's majority equity holder Oaktree Capital Management since the summer.

Trilogy Capital LLC partner Oren Cohen estimated that Classic, with about $182 million in debt and cash flow of about $52 million, is worth about $720 per subscriber, far below the industry average of between $2,000 and $3,000 per customer.

"That's the attraction," Cohen said. "They're getting in at the bottom of the market."

In many Classic markets, satellite dishes outnumber cable hookups.

Rural service fund?

"That leaves you a lot more flexibility," Kent said. "You may be able to lower your price and it doesn't take many additional customers to make up for that price decrease. Also, if you bundle and give discounts for high-speed data, that's something satellite can't compete with."

Delivering broadband to the rural masses proved impossible for Classic in its earlier iteration. Kent hopes Washington might give the new Classic a jump-start. He plans to lobby for something like the Universal Service Fund, used to bring telephone services to rural markets, for cable high-speed data services.

While utilities pay into the USF, programmers would bankroll the data fund, in Kent's conception.

"The Universal Service Fund worked very well in getting electricity and telephone to the rural markets," Kent said. "A Universal Service Fund in which the programmers pay into [the fund] is a perfect way to achieve a political solution. I certainly am going to float the concept."

The Federal Communications Commission runs a $2.2 billion annual program to subsidize broadband for schools and libraries. Cable operators withdraw from the fund but do not contribute to it in their capacity as video-programming and information-service providers.

The FCC has until July to act on a board recommendation not to use universal service funds to subsidize broadband in rural areas. Last week, Reps. Phil English (R-Pa.) and Robert Matsui (D-Calif.) introduced a bill that would provide generous tax credits to cable companies and others that deploy high-speed data facilities in low-density communities.

Daniels & Associates represented Classic, the second cable deal the Denver-based cable investment bank has been involved in during the past few weeks. It represented Comcast Corp. in its pending sale of 317,000 subscribers in Wyoming, Colorado and Utah to Bresnan Communications Inc., headed by longtime MSO honcho Bill Bresnan, who's returning to the cable ranks after selling out to Charter in 2000.

Others who've already bought their way back into the industry, or figure to do so soon, include Steve Simmons, Neil McHugh, Ben Hooks and Steve Weed.

Ted Hearn contributed to this report.

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