Charter Communications said its chairman and controlling shareholder, Paul Allen, was recently approached by unnamed investors inquiring about possible investments or transactions with the St. Louis-based cable company.
According to a document filed with the Securities and Exchange Commission last Tuesday, Charter said that Allen has received “informal inquiries from various parties regarding investments or transactions involving the company.” Charter did not identify those parties but said that with the consent of its independent directors, Charter recently provided a “limited number of those parties certain material non-public information under nondisclosure agreements.” Charter said that there is no assurance that any investment or transaction will result from the informal inquiries and that it will make no further comment “unless it deems such communication appropriate.”
Just what those inquiries are about remains to be seen. Charter, saddled with more than $19 billion in debt, has struggled over the past few years with a declining subscriber base as it tries to roll out new services like telephony. In the fourth quarter, Charter managed to increase revenue by 10.3% to $1.55 billion and cash flow by 12.6% to $567 million — its fifth straight quarter of double-digit revenue and cash-flow growth. But the St. Louis-based cable operator lost 66,000 basic customers in the period — it lost 116,000 basic customers for the year. The question remains whether the parties are inquiring about an outright sale of the company, the divestiture of some systems or just a small investment.
In a research note, Citigroup cable analyst Jason Bazinet had his own theory about the inquiries.
“We suspect this relates to potential system sales,” Bazinet wrote. “However, we believe sales are unlikely if a capital raise is successful.”
Charter has several properties that could be attractive to other larger operators or private-equity groups — including those in Los Angeles and Fort Worth, Texas — but so far has been reluctant to sell. With Charter stock trading below $1 per share, a buyout wouldn’t be costly. But Allen, who has about $7 billion of his own money tied up in the company, is not likely to sell out at bargain prices.
While Credit Suisse First Boston media analyst Bryan Kraft wrote in a research note that Time Warner Cable could be a potential buyer of Charter — especially since it could be separated from parent Time Warner Inc. as early as April — an outright buy of Charter is more complicated than just offering a premium for the stock.
While Charter’s equity could be snapped up for a relatively low price — its stock was trading at 79 cents per share in midday trading last Thursday and its market capitalization is about $316 million — that isn’t the biggest obstacle. Charter’s $19.9 billion in debt is. Some analysts believe an easier way to gain control at Charter is to buy the debt.
A plan to draw down about $500 million in incremental term loans and issue another $520 million in second-lien notes should solve its liquidity problems for the near term. Charter said the money would fund it through 2010, but that if it could not access additional cash after 2010 it could be forced into bankruptcy.
Charter has faced these types of crises before and has always managed to refinance its debt to give it more breathing room. Miller Tabak media analyst David Joyce said that the company usually has to disclose worst-case scenarios when it issues additional debt, but did not believe the company was teetering on the edge of default.
“They’re not going to go out of business,” Joyce said.
All this comes on the heels of an announcement last Monday that chief financial officer Jeffrey T. (JT) Fisher would resign on April 4. Fisher will be replaced in the interim by senior vice president of strategic planning Eloise Schmitz. While that is sometimes a sign of bad tidings to come, most analysts took it in stride, Schmitz, who has been with Charter since 1998 and is one of the main architects of its financial structure, is widely respected in the financial community.
“Virtually every investor we speak with is complimentary of Eloise Schmitz,” Bazinet wrote. “Her in-depth understanding of Charter’s capital structure and liquidity has elevated her status with most investors as the de facto CFO at Charter. As such, somewhat unusually, her appointment as interim CFO could actually be viewed positively by the Street.
“And, in the same vein, the departure of Mr. Fischer should not cause much concern among equity holders. Indeed, it will be interesting to see if Ms. Schmitz is elevated to the CFO post on a permanent basis. That, too, we believe would be viewed positively by the Street.”
