Rutledge Tempers Deal Frenzy

CEO Says Charter Could Achieve Goals With or Without Acquisitions

Despite the incessant deal chatter that has surrounded Charter Communications in the past several months, CEO Tom Rutledge told analysts and investors during its second quarter earnings conference call that the mid-market MSO can survive without making a big deal.

Charter has been at the center of the deal speculation cyclone that began swirling in mid-June after reports surfaced that one of its largest shareholders – Liberty Media – had approached Time Warner cable about a possible transaction. While that approach was initially rebuffed, Charter and Liberty apparently have been hard at work trying to find a way to acquire TWC at the same time it is investigating possible deals with Cox Communications and Cablevision.

Rutledge said that he would not answer any specific M&A questions on the call, adding that Charter is focused on growing organically and it would be disciplined regarding any potential deals.

But later on the call, asked if scale economics could be achieved through a series of small acquisitions rather than one large one, he referred to its recent purchase of the former Bresnan Communications from Cablevision Systems.  Those systems had about 325,000 customers in Montana, Wyoming, Colorado and Utah.

Rutledge said Bresnan was an opportunity for Charter to grow its market share and to take its superior infrastructure  and place more products on it that create value for the customer.

“The cable infrastructure that we have at Charter and the cable infrastructure that was in place at Bresnan before we purchased it allows us to do that,” Rutledge said. “That’s the single biggest economic driver that we have at our disposal.”

Regarding additional scale and its affect on programming costs, Rutledge said it all depends on how you use it.

“Beyond that, if you get to a certain scale, you have a different form of leverage in programming negotiations,” Rutledge said. “You can argue about where that is. It’s not just scale, it’s also a willingness to use that scale to affect your outcome. How much you need or how big you need to be is a difficult question to answer.”

Later, Rutledge said that Charter is working hard to grow scale organically, by adding more customers.

“Our big opportunity is to take advantage of our inherent strength and grow our share,” Rutledge said. “That’s what we are focused on. As far as timing with M&A, I think Charter can be extremely successful without it and potentially with the right deal, even more successful.”

Those comments had a slightly negative effect on the stock. Charter shares were up about 2.8% ($3.59 each) to $133.74 per share in early trading before the 10 a.m. call, but fell about 2.3% ($3) to $127.15 each at around 11:04 a.m.  

Operationally, Charter has been moving steadily forward – in the second quarter basic video customer losses improved to 48,000 compared to a loss of 66,000 in the same period last year.

Charter also added 40,000 high-speed Internet customers – better than the 29,000 additions in the same period in 2012. Telephony additions in the period were even better – 46,000 compared to just 6,000 in the prior year.

Financial metrics were solid, with revenue rising 4.7% and cash flow basically flat at $692 million (compared to $693 million in the prior year), reflecting the company’s recent initiative to focus on high-value products and service.

Rutledge said Charter is making strides in upgrading its network – it  expects to be all-digital by the end of 2014 – and the improvements are already having an effect on certain markets, For example, Rutledge said that in its Fort Worth, Texas market, customer have access to 140 HD channels, full video on demand and an interactive programming guide. In addition, Rutledge said about 30% of Charter’s spectrum in Texas is “empty,” meaning more products and higher speed data service could be on the way.

Overall, Rutledge said that its investment in plant has allowed Charter to offer at least 100 HD channels in all its markets – up from 75 just 12 months ago. About 65% of Charter’s Internet customer base receive data speeds of 30 Mbps or higher.