From today's WSJ:
Paul Allen's in Danger Of Losing His Charter
By PETER GRANT
Staff Reporter of THE WALL STREET JOURNAL
The lights are dimming in Paul Allen's wired world.
The Microsoft Corp. co-founder has invested billions of dollars in businesses tied to his vision that cable-television technology will lead U.S. households into a future of new interactive services and interconnected appliances. But results have ranged from lackluster to dismal for many of these ventures -- such as cable network Oxygen Media, telecommunications company RCN Corp. and Digeo Inc., a developer of digital-TV services.
Now, the centerpiece of the strategy is in danger of collapse.
That centerpiece is Charter Communications Inc., the country's third-largest cable company, in which Mr. Allen has invested $7.4 billion. Overleveraged and underperforming, the company's cash before interest and capital expenditures, among certain other items, isn't growing enough to service its debt, analysts say. The cash flow tallied about $2 billion last year, analysts estimate, while debt will rise to close to $20 billion by the end of this year.
Many analysts agree that a balance-sheet restructuring is inevitable, with a possible battle for control between Mr. Allen and Charter's creditors. The big questions: When will it occur and what form will it take? On timing, the likely answer is sooner rather than later. As for the structure, it all depends on how much more money Mr. Allen is willing to shovel into Charter.
"It's time for Paul Allen to decide whether he wants to retain control of this company," says Aryeh Bourkoff, a cable analyst with UBS Warburg.
A spokesman for Mr. Allen and his investment firm, Vulcan Inc., said Mr. Allen "remains committed" to Charter, but declined to comment on a possible restructuring. A Charter spokesman declined to comment.
St. Louis-based Charter actually could limp along without taking action until 2005, when it begins to face principal-repayment obligations on its debt. Moody's Investors Service warned earlier this month that Charter is in danger of violating the covenants of its bank loans as early as this quarter. But Charter executives have determined that they can stay in compliance by converting some $656 million in intercompany loans into equity, people familiar with the situation say.
Mr. Allen and Charter have another incentive to delay: The company is under investigation by the U.S. attorney's office in the Eastern District of Missouri and the Securities and Exchange Commission over its methods for counting subscribers and accounting for capital expenditures. This has tied Mr. Allen's hands by adding litigation risks to any actions he may take. He will likely have more flexibility once the investigations are concluded.
But pressure is building on Wall Street for quick action by Charter's board and by Mr. Allen, who owns about 54% of Charter's common stock and 93.5% of its voting shares. The common stock has plummeted to close to $1 a share, from an all-time high of more than $26 in 1999. Wall Street's pessimism stems from the low chance that Charter's weak operating results will improve. The company's cable systems, many of them in small and midsize cities, have proved to be particularly vulnerable to competition from satellite-TV businesses, losing close to 300,000 subscribers last year to drop to a total of about 6.7 million.
Any hope that Charter could grow its way out of its problems was dashed by a company announcement two days before Christmas. Charter said that it was firing its chief operating and chief financial officers, and that the company wouldn't even hit its earlier fourth-quarter estimate of a weak 3% to 5% increase in cash before earnings, taxes, depreciation and amortization, a common performance benchmark for the cable-TV sector.
Meantime, the vultures have begun to circle. Smelling blood, firms that invest in distressed debt have started to buy up Charter's bonds and convertible notes, buying junior notes for as low as 25 cents to the dollar of face value. These investors believe Charter's creditors could take control of the company in a restructuring similar to the one recently completed at NTL Inc., a U.S. company that owns European cable operations.
But potential allies of Mr. Allen and current management who could help recapitalize Charter also are lining up. One is Texas billionaire Mark Cuban, whose high-definition-TV networks recently did deals with Charter. (Also, like Mr. Allen, Mr. Cuban is a National Basketball Association owner. He owns the Dallas Mavericks, while Mr. Allen owns the Portland Trail Blazers.) Mr. Cuban reported to the SEC last fall that he had a 5.3% stake in Charter's stock. Last week, he said he had acquired an undisclosed amount of debt in the company and supports the course set by Charter management.
With the company in a downward spiral, the sooner it restructures the better the terms for shareholders, analysts say. Last summer, Mr. Allen filed papers with the SEC stating that he was considering numerous options, including buying back debt, taking the company private and a debt-for-equity swap. Signs are mounting now that Mr. Allen is moving toward a decision on a specific course of action. His investment firm, Vulcan, recently hired Miller Buckfire Lewis & Co., a restructuring-advisory firm, people familiar with the situation say. Charter's board has formed a restructuring committee, and the company is preparing to select its own financial adviser, the people say.
The optimal restructuring for Mr. Allen would be a debt swap similar to the one accomplished late last year by the telecom carrier Qwest Communications International Inc. Qwest cut its debt by $1.94 billion to $22.6 billion by persuading -- some would say coercing -- creditors to exchange their debt for bonds with a lower face value but with a higher interest rate and greater security.
But chances are Charter's creditors would be more resistant than Qwest's to such an offer. The cable industry has a better growth story than the telephone business, thanks to new revenue streams from the sale of Internet connections, video on demand and other new services. Given this promising future, creditors say they would be willing to force Charter into bankruptcy-court protection if they aren't happy with Mr. Allen's restructuring plan.
If creditors can't be persuaded to reduce their debt, Mr. Allen clearly has the money to buy back enough debt to restore Charter's balance sheet to health. Forbes magazine last year estimated his net worth at $21 billion, down from the $40 billion Forbes said he was worth in 1999. Moody's estimates that Charter's debt load would have to be reduced by more than $4 billion to a total of about $15 billion to be supportable by the company's cash before interest, taxes, depreciation and amortization. At current market values, it would cost Mr. Allen $1.5 billion to $2 billion to buy that much back.
But buying back debt also would have a hidden cost for Mr. Allen, because of Charter's unusual tax structure. The Internal Revenue Service considers debt forgiveness as taxable income, an obligation that ordinarily would be on the company. But if Mr. Allen bought back debt and forgave it, the tax obligation would be his. That is because of a 1999 agreement he reached with the company, which allowed him to take advantage of all the company's tax losses, $5.4 billion between 1999 and 2001 alone. Mr. Allen's tax bill in a restructuring could be more than $1 billion, depending on how much debt is forgiven and whether Charter generated offsetting losses, tax experts say.
Because of the tax pressure, UBS Warburg's Mr. Bourkoff says a likely restructuring scenario would be a debt-for-equity exchange offer negotiated with creditors and structured as a "prepackaged" bankruptcy. That would likely enable Mr. Allen to avoid the tax consequences from debt forgiveness. But it also would give creditors a big chunk of the company, as much as 90%, according to a recent report by Mr. Bourkoff. |
