IN THE MONEY: Buyout Talk Won't Help Charter Comm Holders
24 Jan 16:22
By Michael Rapoport
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--It sounds like good news for Charter Communications
Inc.'s (CHTR) beleaguered shareholders, but it really isn't. In fact, if it
comes to pass, it'd be about as bad as it gets.
Several private-equity firms are reportedly mulling the idea of buying
control of Charter, the troubled, debt-laden cable-TV company now controlled by
billionaire Paul Allen. Goldman Sachs Capital Partners, Thomas H. Lee Partners
and The Carlyle Group are among the names bandied about as potential investors,
in what TheDeal.com said could be bids of more than $1 billion to gain control
of Charter. (All three firms declined to comment.)
Wait - isn't that good news? Maybe, for Charter itself. But Charter's
shareholders should take this buyout talk as a sign to run, not walk, to the
nearest exit, dispose of their shares, and be thankful they can still get about
a buck and a quarter for them.
Because a private-equity buyout of Charter will almost certainly involve one
of two things, and perhaps both: A Chapter 11 bankruptcy filing, or an exchange
of a big chunk of Charter's $20 billion debt load for new equity in the
company. Either one would be a disaster for shareholders, since bankruptcy
typically results in existing common shares becoming worthless, and a big
debt-to-equity swap would dilute the value of Charter's existing shares so much
that they'd be virtually worthless.
A Charter spokesman couldn't be reached for comment. But to see how and why
this would happen, put yourself in the shoes of one of these prospective
bidders.
Say you like Charter as a business, and you've decided to pump in $1 billion
in exchange for control of the company. But if that's ALL you do, then you've
got a problem: Charter's enormous huge load is now effectively your
responsibility. Naturally, you're goingto want to get rid of some of that debt
before you agree to invest.
The only way to do that is to negotiate with the bondholders and come up with
a way to restructure Charter's debt and lighten its load. In a situation like
this, that's often done through a prepackaged Chapter 11 filing - an agreement
between Charter and its creditors on a plan to reorganize the company that will
be implemented through a quick, in-and-out trip to bankruptcy court. (As quick
as trips to bankruptcy court get, anyway; it still could take months.) The
outside investor would get control of Charter, the bondholders would get
minority stakes in the company... and the existing common shareholders would
wind up with little if anything.
Even if there isn't a bankruptcy, however, Charter needs to get its debt
under control. Standard & Poor's, Moody's Investors Service and analysts have
all openly suggested that such a debt restructuring may be needed. But a
restructuring doesn't come for free; to persuade debtholders to give up some of
that debt and ease the company's burden, you've got to give them something. The
most likely possibility is a big debt-for-equity swap.
Moody's has suggested that Charter needs to reduce its debt by $5 billion to
$6 billion. Let's assume for the sake of argument that that debt is converted
into equity, not even at full value, but at 45 cents on the dollar - that's
roughly the level at which Charter's largest note issue is currently trading,
so that suggests the amount that current buyers of the notes expect to realize
for their investment.
Under this scenario, then, maybe $2.5 billion of new equity would have to be
issued to reduce the debt by the amount required. And since Charter's current
market capitalization is only about $360 million, the new shares would dilute
the value of the existing shares almost into oblivion. If $2.5 billion of new
shares are issued to creditors in a debt-for-equity swap, that would leave
existing shareholders with only 12.6% of the company's equity, instead of 100%.
If you convert that debt to equity using the current going rate on Charter's
bank debt, roughly 85 cents on the dollar, it looks even more depressing for
shareholders. That means that in a debt-for-equity swap to reduce debt by $5
billion to $6 billion, you'd issue at least $4.25 billion in new equity. Now
you'd need a microscope to find that existing $360 million.
In other words, shareholders might wind up with zero value for their shares
if the company goes into bankruptcy, or a small fraction of their current value
if it doesn't. Heck of a choice.
Now, while a Charter debt restructuring looks inevitable, a huge loss of
value for common shareholders doesn't have to happen. This outside interest
started when Charter suggested that Allen himself might take the company
private; in theory, Allen could simply buy the Charter shares he doesn't
already own, presumably for at least market value, and take upon himself the
responsibility for getting the debt restructured. (Of course, if Allen were
going to do that, the question becomes: Why hasn't he done it already? Because
he knows what's going to happen to the equity, that's why; if he wants to
invest more in Charter, he'd be smarter to buy the debt.)
And there's always at least the chance, however unlikely, that a debt
restructuring agreed to early enough and implemented through Chapter 11 CAN
preserve value for shareholders. The most prominent example here is Covad
Communications Group Inc. (COVD), whose shareholders retained 80% of the
company when it emerged from bankruptcy in 2001, after creditors agreed to
restructure the debt before the Chapter 11 filing. Of course, Covad had only
$1.4 billion in debt to worry about, not $20 billion, making it a little easier
to preserve value for shareholders.
Still, the chances that this is going to turn out well for shareholders don't
look good. And while the potential interest in investing in Charter is said to
be in the early stages, the clock is ticking. Shareholders may want to act now;
if they wait till later, it may be too late.
- Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(Janet Whitman and Nicole Bullock also contributed to this story.)
(END) Dow Jones Newswires
01-24-03 1622ET |
