Charter Stabilizes

May 12, 2003  •  Post A Comment

Charter Communications is still bleeding red ink, but the troubled cable system operator finally appears to have stabilized and may even be on the verge of a turnaround.
To be sure, the St. Louis-based company, cobbled together by Paul Allen at a cost of more than $7 billion as part of a vision for a wired world, still has a long way to go. But there is reason for hope. Charter continues to labor under a $20.5 billion debt and faces SEC and federal probes for accounting shenanigans. But Charter is taking steps to right itself-and the efforts are drawing mild praise from some analysts.
Last week Charter, the nation’s third-largest multiple system operator with 6.7 million subs, reported a narrowed first-quarter loss of $181 million, or 62 cents a share, compared with a year-ago loss of $316 million, or $1.08 a share. Revenue advanced more than 10 percent to $1.18 billion, while adjusted earnings before interest, taxes, depreciation and amortization climbed more than 7 percent to $458 million.
What’s more, the company has mapped out a plan to manage capital expenditures, spending only on initiatives that are certain to generate revenue-like digital cable and high-speed Internet services-and keeping inventories low to better contain costs. Asset sales could be a piece of the puzzle as well, though analysts say that might have to wait until the accounting probes are sorted out.
“We are reasonably pleased with our results,” said Carl Vogel, Charter’s CEO. “We have got a lot of work to do, but we are totally focused and have a greater clarity with our balance sheet.”
That must surely be good news to Mr. Allen, the Microsoft co-founder who, with a net worth of $20.1 billion, ranks as the fourth-richest man in the United States. Charter has been his biggest investment, some say his biggest dream-and his largest headache. The culmination of a string of cable acquisitions from the late 1990s through 2002, Charter has been the vehicle by which Mr. Allen envisioned enabling consumers to surf the Web from the comfort of their living rooms. With that idea in mind, Charter snapped up smaller cable companies, many of which were in rural areas and were in need of system upgrades or rebuilds in order to accommodate the types of services Mr. Allen dreamed about.
“I think Charter ended up having a bigger job than it thought it would upgrading those systems,” said David Joyce, a cable analyst at Guzman & Co. He noted that because many of the systems Charter owned were in rural areas, the upgrade costs proved more expensive than those for systems in more developed areas.
Web Woes
Mr. Allen was not available for comment.
As the Internet bubble burst and the economy declined, Charter was unable to generate sufficient subscriber growth to offset the piling on of debt. It also suffered because the rural systems that needed upgrading slowed efforts to roll out digital service. That cost the company market share, especially to low-cost satellite provider EchoStar Communications, which offered cheaper digital service to customers immediately.
“Cable had structural issues before Paul Allen” started investing, said Aryeh Bourkoff, a cable analyst at UBS Warburg, citing the upgrade challenges. “He didn’t plan on the competition from satellite, and EchoStar was very aggressive.”
Then things got a lot worse when Charter discovered accounting irregularities in how it booked new subscribers, programming fees and capitalization expenditures. The misstatements forced Charter to restate 11 quarters’ worth of financial results because of accounting improprieties. Charter recorded a $206 million charge for the restatements, which triggered investigations from the Securities and Exchange Commission and a federal grand jury in St. Louis, both of which are ongoing.
“Charter’s issue was that they were too aggressive in their accounting and took a very strong acquisition path,” said Alan Bezoza, a cable analyst at CIBC World Markets. “They grew too fast.” But he stressed that those woes were not unique to the cable industry and did not reflect a miscalculation on Mr. Allen’s part.
Mr. Allen clearly must have faith in Charter’s ability to recover. Earlier this year he offered to set up a $300 million credit facility for the company, enabling it to steer clear of loan term violations.
On top of that, Mr. Allen is on the hook for a $725 million stake in Charter that is now held by cable giant Comcast. As part of Comcast’s acquisition last year of AT&T Broadband, it inherited a stake in Charter that Mr. Allen, as the controlling shareholder, was required to purchase last month. Mr. Allen and Comcast are negotiating a way to settle that so-called “put,” as the stake is worth far less than the required payment. One option being discussed is transferring cable systems in Texas or New England to Comcast.
But despite those challenges, many analysts see Mr. Allen in it for the long haul-and for good reason. Assuming Charter can get past the accounting probes and make progress in paying down its debt, the company is poised to start generating free cash flow in 2004, said Ted Henderson, an analyst at Stifel Nicolaus.
Entertainment Assets
Based on his track record of entertainment-related investments, anything short of bad news might be a welcome change.
DreamWorks SKG is perhaps the brightest spot in the entire portfolio, but even that success, which has mainly been in its film division, came after years of missteps. Mr. Allen owns a 25 percent stake in DreamWorks through his company Vulcan, which manages his investments.
Other media stakes have been less stellar. For example, Mr. Allen is an investor in Oxygen Media, the women-oriented cable channel that has been gasping for ratings. He also owns the Seattle Seahawks professional football team, which has had a string of marginal seasons.
And he owns the Portland Trail Blazers pro basketball team, which, despite 21 consecutive playoff appearances, is better known for its bloated salaries and its players’ run-ins with both league officials and the law.