No. 7 -- with a Bullet Paul Allen Lands $4.5B Charter Deal

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Billionaire Paul Allen vaulted to seventh place on the MSOlist last week, agreeing to buy Charter Communications Inc. for $4.5billion.

Allen, who co-founded Microsoft Corp., will combine No. 12Charter with No. 11 Marcus Cable Co. L.P., his $2.8 billion acquisitiontwo months ago, forming a company with about 2.4 million subscribers.

The management will look like this: Marcus Cable chairmanJeffrey Marcus will be chairman; Charter CEO Jerald Kent will be CEO; and Charter chairmanBarry Babcock will be vice chairman. The company will locate in St. Louis, where Charteris headquartered.

Allen's investment adviser, William Savoy, said hisboss is still in the hunt.

"As long as opportunities like this are out there, wewill continue to be aggressive," he said. Other criteria include geographic fit and"reasonable" cost, Savoy added.

Investors pegged 2 million-subscriber AdelphiaCommunications Corp. as a possible target. Adelphia's share price soared by18 percent, closing up more than $6, at $39.63. The speculation spotlight also hit CenturyCommunications Corp., as its 1.3 million subscribers would fit well with Marcus' andCharter's -- especially with all three companies operating in the fractured LosAngeles cable market.

Allen is paying a lot for Charter. The deal works out toabout $3,700 per subscriber. Marcus went for around $2,500 per subscriber, after plannedsales of some 200,000 noncore subscribers.

Another key deal multiple is 14 times 1999 cash flow. Allenfigured that he bought Marcus for 11 times running-rate cash flow, and that AT&T Corp.is paying 13 times 1999 cash flow for Tele-Communications Inc.

Savoy pointed to the Charter systems' geographic fitwith the Marcus systems, and to their high cash flow on a per-subscriber basis, to justifythe premium price.

"We paid full value for Charter," Savoy said."I don't think that we paid an expensive price."

Savoy also praised Charter's management, as he andAllen had praised the Marcus team.

The combined company, which hasn't been named yet,will keep some operations in Dallas. But it was unclear whether all of Marcus'management team -- such as chief operating officer Lou Borrelli -- would be retained.Savoy, president of Allen's Vulcan Ventures, did say that the Dallas staffwouldn't be swept away. The Allen cable operation is doubling in size, he added, andit will need lots of skilled managers.

Allen is buying about 90 percent of Charter's equity,Savoy said. Charter co-founders Kent, Babcock and Howard Wood -- the Charter vice chairmanwho will become a "senior adviser" to the new company -- will own stakes in theoperation.

Selling out are Charter's backers, notably KelsoInternational Inc. and Charterhouse International Group Inc. They've backed Chartersince its founding in 1993, bankrolling 22 acquisitions along the way.

Publicly owned Gaylord Entertainment Co., which sold cablesystems to Charter in 1995, said its piece of the Charter deal amounts to $370 million, inprepayment of a promissory note and payment for participation rights. Gaylord said itsafter-tax gain will be $95 million, or $2.85 per share, after the deal closes later thisyear.

Kent, Wood and Babcock had left Crown Cable after itswallowed up their company, Cencom Cable Associates. Charter now has about 2,500employees.

Kent said Charter had reached "a crossroads." Itwas looking at expensive long-term investments in deploying high-speed access and othernew services, such as WorldGate Communications Inc.'s Internet-TV offering.

Those long-term investments weren't necessarily inline with Charterhouse's and Kelso's priorities as financial backers who alreadyhad their money in for several years. Marcus Cable was in a similar situation withlongtime financial backers such as Goldman Sachs & Co.

Charter also found that it couldn't compete in somecable-system auctions -- such as the one held in May for Prime Cable Las Vegas -- becausesellers wanted stock that privately owned Charter couldn't offer.

For those reasons, Charter was well along the way toward aninitial public offering of stock this fall, Kent said. It had drafted the registrationstatement, and it was shopping for underwriters. Kent added that talks with Marcus began afew months ago, and that they "heated up" when Allen entered the negotiations acouple of weeks ago.

The sale to Allen brings Charter a "patient"long-term investor with plenty of cash and access to media and technology companies thatwere previously unavailable to Charter, Kent said. "Frankly, as I told Bill [Savoy],this ended up, from our evaluation, to be the absolute best alternative," he said.

Allen says he is building a "Wired World,"combining high-bandwidth distribution platforms with multimedia content. The Charter dealis his biggest investment to date.

Marcus offers @Home Network high-speed-data service inDallas, and Charter has launched its own high-speed-data service, Charter Pipeline, in LosAngeles and Riverside, Calif. Charter also offers WorldGate in St. Louis.

Savoy said Allen's cable operations hope to be atechnology leader. But he and Marcus said Allen doesn't want to rush new serviceofferings.

"Paul does not need to see a return tomorrow,"Marcus said.

The Marcus and Charter systems complement each otherreasonably well. Both companies have operations in the fractured Los Angeles market, wherethey will have a combined 400,000 subscribers, and both are clustered in Southeasternstates.

Marcus said its systems are among the most advanced in theindustry, in terms of upgrades to activated two-way plant. The Charter systems face a30-month rebuild to get to 86 percent-activated two-way plant. By the end of 1999, 84percent of the Marcus plant will be at 750 megahertz with activated two-way capability.

The Marcus deal gave cable stocks a lift -- notablyAdelphia and Century -- during a week in which the specter of cable reregulation emergedin Washington, D.C.

Analyst Ted Henderson of Englewood, Colo.-based JancoPartners Inc. said deals like the Charter buyout help to reaffirm public-market values,which lately have risen to at least close to private-sale multiples.

Historically, when public and private values cross,that's a sign that stock prices have peaked, and that they will reverse course, hesaid.

"It's not happening" to stocks now,Henderson said, "and I don't think that it will. It's very much of aland-rush mentality. And it's not a fool's land rush: It's about spectrumand connectivity to the home."

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