Vogel Talks of Life During Turnaround


Charter Communications Inc. CEO Carl Vogel looked surprisingly at ease as he sat in a hotel suite here on Sept. 17, approaching two years into his term running Paul Allen's cable company.

Vogel's been under steady pressure since he came on board in October 2001: Trying to stem heavy subscriber losses. Working through earnings restatements. Responding to fires begun by federal investigations into its past accounting practices, shareholder lawsuits and the indictment of four former employees.

It wasn't quite what he'd expected, he said. "I didn't think we would be going through the things that we have been going through, like the restatement and the litigation," Vogel recalled.

"Maybe I thought they were a little further along than they were."

Vogel has made strides on the operations side, restructuring Charter's field operations into six divisions and hiring many new managers, including former Cox Communications Inc. executive vice president Maggie Bellville as chief operating officer.

"What I tried to do is look at people that were successful in the role that we've asked them to play and had done the job we'd asked them to do and have done it well," Vogel said.

"People like Maggie Bellville, [senior vice president, engineering and technical operations] Wayne Davis, [vice president, sales and marketing] Kip Simonson, [senior vice president, Western division] Eric Brown, [senior vice president of operations, Midwest region] Lee Clayton, [senior vice president of operations, Southeast division] Chuck McElroy, and [senior vice president of operations, Great Lakes region] Mike Haislip. We've done similar things at the divisional level and the general-manager level. We've replaced the GMs in almost all of our top markets.

"We're trying to raise the bar."

2003 is a transitional year for Charter. In 2004 Charter, will move deeper into Internet-protocol telephony, high-speed data, video-on-demand and digital video recorders.

"In 2005 I think I'd like to see some of the fruits of that," Vogel said. "We're playing for the long run."

Vogel said that many miss the forest for the trees. "Charter is sometimes misunderstood," Vogel said. "That is as much about the environment that we've been in. But 80% of our customer base is in 61 headends. That's a pretty good business. We're in 40 states.

"If you look at Charter's results, we have not done as well as we should in a place like St. Louis," he continued. "Part of that is we're going through the rebuild, a fair amount of negative press and we've gone through various rate increases and channel lineup changes.

"But a lot of that will be behind us by the end of 2003."

Charter's been selling some systems to trim debt, but Vogel hinted in the future he might try to expand Charter's footprint — it currently has about 6.5 million subscribers — through acquisitions or swaps with other MSOs.

Charter sold about 250,000 subscribers to Wave Division Broadband and Atlantic Broadband LLC this year, and has another 250,000 subscribers in nonstrategic areas to sell.

Vogel said one area where the company won't shed subscribers is Los Angeles, where it has about 500,000 customers.

"The consolidation of Los Angeles is the fundamental question. We'd like to get larger, not smaller, in Los Angeles."

Vogel also has made progress in shedding nonpaying customers and refocusing Charter on higher-margin customers, or those who pay for advanced services.

Charter lost 41,000 basic subscribers and 47,000 digital customers in the second quarter, the sixth consecutive quarter of basic-subscriber losses (subtracting about 450,000 basic customers during that period), and the second consecutive quarter of digital-subscriber losses.

Financial numbers did improve — revenue rose 7% and cash flow rose 11% — but much credit went to cost-cutting, not operational improvement.

For example, Charter cut marketing expenditures 33% in the second quarter.

"It wasn't like the revenue numbers were so great," Fulcrum Global Partners analyst Richard Greenfield said. "The growth was made by cutting costs."

Vogel said Charter has several programs in place to bring subscriber numbers up, like marketing and promotional programs that tie new customers to longer-term contracts.

He said most of the customer losses occurred last year, when Charter was tightening credit policies to remove nonpaying customers.

The subscriber numbers would rise with "a combination of good marketing and compelling programming, digital and data offerings," said Vogel. In the same six-quarter time frame, Charter added 800,000 revenue-generating units, he said.

"You will see us stem the tide," Vogel said.

What's really hurt the stock is heavy debt: about $19 billion, or 9.7 times annual cash flow.

Charter has talked a lot about reducing debt, but made few inroads. ( It did raise about $800 million through the sales to Wave Division and Atlantic Broadband.) The steps it has taken have disappointed most Wall Street analysts.

Last Friday, Charter unveiled an agreement to buy $609 million of convertible senior notes and $1.3 billion of senior discount notes of its subsidiary Charter Communications Holdings LLC.

In a complicated transaction, Charter subsidiary CCH II LLC will issue $1.6 billion in 10.25% notes due 2010. Exchanges are expected to occur on Sept. 23.

The deal basically pushes out maturities on half of Charter's convertible debt another four years.

Charter's $1.3 billion in convertible debt was coming due in 2005 an 2006.

Vogel appeared to believe that the deal was a major step for Charter, but some analysts weren't sold.

For one thing, the latest deal looks similar to a $1.7-billion high-yield bond deal Charter scrapped last month due to unfavorable market conditions.

Charter had planned that private placement offering to buy back about $1.38 billion in notes convertible into Charter common stock. Ultimately it would have retired about $500 million in bank obligations.

The most recent debt deal didn't win much more in the way of plaudits.

"They're purchasing half of the $1.3 billion in converts and it isn't cheap to do," Greenfield said. "It helps mitigate the threat of bankruptcy, but it doesn't remove the larger issues."

Trilogy Capital Partners LLC principal Oren Cohen said the proposal only deleverages by about $300 million and places the $1.6-billion-note holders ahead of the senior bondholders — not good news for the latter.

"What they're doing is buying themselves time," Cohen said. "All this looks like is a Hail Mary strategy to preserve as much equity value for the current equity holders as possible, without really doing something responsible for the balance sheet. The only way this is at all good is if it allows the stock to rise further and they have a strategy to sell a lot of equity at a higher stock price."

The announcement gave a slight lift to Charter's shares last Friday, up 18 cents to 89 cents each in afternoon trading.

In a conference call last Friday, Vogel said equitizing the converts was an option that Charter continues to look at.

"We're not suggesting that this solves all our issues," Vogel said on the call. "We continue to evaluate the equity price and what market opportunities present themselves. We're trying to balance that with what we think is reality for bondholders. This was one important step the market was asking us to address. We will continue to look at our shares and debt reduction."

Cohen conceded in an earlier interview Vogel made strides in improving operations — he rated Vogel a "B" on that front. But was disappointed in its lack of a debt reduction strategy.

"Charter seems to be doing well operationally, they're getting the right people in the right places and they have managed to slow down the subscriber losses," Cohen said. "I'm not a big fan of their last attempt to restructure the balance sheet … They get a gentlemen's 'C' on the financial front."

For Vogel, and for Charter chairman and principal shareholder Paul Allen, grades like that will have to suffice, at least for this year.