Charter Communications' deliberations on doing an initial
public offering has MSO and Wall Street executives speculating that others could follow in
its wake.
If it goes forward, Charter, the St. Louis-based MSO
controlled by Microsoft Corp. co-founder Paul Allen, would be the first large cable IPO in
more than a decade.
According to Paul Kagan & Associates, the last time a
major MSO entered the public market was Cox Communications Inc., which was spun off from
Cox Enterprises Inc., in 1995 after its acquisition of Times Mirror Corp.'s cable
assets. But the last true initial public offering in the cable sector was way back to 1986
with Cablevision Systems Corp.'s 6.25 million share IPO.
Earlier this month at an analysts road show touting its $3
billion junk bond offering, Charter management told the gathering that it was
"interested in pursuing" an IPO later this year, according to sources. While the
company will not officially comment on any plans for a public offering, many industry
observers believe a Charter IPO could gain anywhere between $750 million and $2 billion,
depending on how much of the company Charter wants to sell to the public.
Although Charter has been part of a small group of
privately-held cable companies that have been on the IPO radar for quite awhile -- Lenfest
Group and Falcon Cable Inc. are the others -- some analysts believe that the time has
never been more ripe for a large cable IPO.
Gary Farber, an analyst with SG Cowen Securities Co. in New
York City, said a Charter IPO could boost the already hot cable sector, given the strength
of the company and the added cachet of Allen's name.
"The average cable stock is trading at about 17 times
cash flow," Farber said. "Could it get richer? This is the strongest [market]
it's ever been for these stocks. The Adelphia deal lit a fire."
Farber was referring to Adelphia's recent agreement to
purchase Century Communications Corp. for $5.2 billion in cash and stock.
Mike Menerey, executive vice president, CFO and secretary
of Falcon Cable Inc., said that it doesn't have to be a large MSO to go public to
encourage others to follow suit, mainly because the market is so attractive.
"I don't think you need a big company to go
first," Menerey said. "The market is extremely attractive and it's
receptive to a company of almost any size."
Perhaps, even a company the size of Falcon.
Menerey said that his company has been evaluating the
possibility of doing its own IPO, but no final decision has been made yet.
But, he added, given the state of the stock market and the
popularity of cable stocks, most of the private companies in the industry are looking
seriously at an IPO.
"It's so attractive, everybody who isn't
public is at least thinking about it," he said. "Clearly this is the best time
the cable industry has seen in at least 10 years."
Many industry observers believe that Allen may be reaching
the point where he doesn't want to invest his own money in cable acquisitions any
more. And though Allen's net worth is estimated at around $22 billion, Charter's
recent acquisition binge may be taking a larger chunk of Allen's bankroll than he
would like.
Since Allen purchased about 90 percent of the company for
$4.5 billion last year -- he earlier bought Marcus Cable for $2.8 billion -- Charter has
acquired American Cable Entertainment for $240 million, Greater Media Inc. for $500
million and Renaissance Media Group for $459 million.
The company also has letters of intent to purchase 402,000
subscribers from InterMedia Partners for cash and cable properties valued at $1.3 billion,
and certain assets of affiliates of Rifkin Associates for cash and systems valued at $1.5
billion.
According to some observers, Allen has about 20 percent of
his net worth tied up in Charter. He may believe at this point that it is time to use
someone else's money to further Charter's growth strategy.
In fact, several MSO have stopped just short of the IPO
altar in the past five or six years, mainly to be bought out by another larger company.
Perhaps the best known of these is Continental Cablevision Inc., the Boston-based MSO that
was purchased by MediaOne Group in 1996.
Continental had planned a $345 million public offering for
January 1996, but pulled the plug citing an unfavorable regulatory climate and soft cable
prices. A few months later, the company agreed to be bought out by US West's Media
Group [now MediaOne Group] in a deal valued at more than $10.8 billion.
Menerey, the Falcon CFO, said his company was set to do its
own IPO in late 1993 and early 1994, but changed its mind after the Federal Communications
Commission expanded cable rate regulation.
"What held us was [former FCC chairman] Reed Hunt
leaking out that he was going to start round 2 of rate regulation," Menerey said.
"We were in the second day of our road show and we cut it off."
But now the climate has changed significantly: FCC rate
regulation is set to expire on March 31; the stock market boom seems like it will never
end, and billion-dollar deals are becoming commonplace.
Because of all this, having public stock currency is
becoming almost a necessity for cable operators that want to expand. "Almost,
yes," Menerey said. "I can't see businesses continuing to attract capital,
whether private equity or debt, given where the values in the public markets now."
Menerey added that aside from deal currency, having public
stock also allows operators to accelerate their upgrade schedules, which could be a boon
for smaller MSOs.
"That's an extremely attractive feature of having
public stock," Menerey said. "Charter is doing a $3 billion bond offering. If
they had stock they wouldn't have to raise that much debt. It [public stock] reduces
a company's leverage. In most companies' cases, it allows you to accelerate your
capital expenditure plan."
