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Charter Bonds Could Lead to System Buys

Charter Communications Inc. increased an earlier high-yield debt offering from $600 million to $900 million last week, a move some analysts view as a precursor to future acquisitions.

Charter priced three tranches of high-yield debt on Jan. 8 — $350 million in seven-year senior notes at 9.25 percent, $300 million in nine-year senior notes at 10 percent and $250 million in 10-year senior discount notes at 12.125 percent. The discount notes have a principal at maturity of $450 million. Charter said it expects the offering to close on Jan. 14.

On Jan. 4, the MSO said it planned a $600 million offering of senior discount notes through subsidiaries Charter Communications Holdings LLC and Charter Communications Holdings Capital Corp. High demand for the bonds prompted the increase.

The company said the debt would be used to repay, but not permanently reduce, indebtedness incurred under its subsidiaries' revolving credit lines, as well as for general corporate purposes.

With the debt offering, though, Charter appears to be moving to free up cash flow, which could be used to make smaller acquisitions.

Speculation has run high that Charter — as well as AOL Time Warner Inc., Cox Communications Inc. and Adelphia Communications Corp. — could be among those MSOs interested in acquiring non-strategic systems from AT&T Comcast Corp., the entity that would be formed by the $72 billion merger of AT&T Broadband and Comcast Corp. That deal is expected to be finalized by year-end.

"The high-yield cable industry has never been so well-funded from a liquidity standpoint, implying that the sector is ripe to make acquisitions, rather than be sold, " said UBS Warburg LLC high-yield cable analyst Aryeh Bourkoff.

Charter spokesman Andy Morgan said the debt offering is not targeted for acquisitions, though the company is always on the lookout for properties that would fit in with its existing clusters.

"We've left the door open," Morgan said. "We definitely would be looking at any properties that fit with our current footprint."

That said, Morgan added that Charter believes it is at a sufficient size with about 7 million subscribers. It's not currently in negotiations with any operators.

In a Securities and Exchange Commission filing last week, Charter said it plans to spend about $2.4 billion on systems upgrades and normal capital expenditures in 2002.

With about $2.6 billion of available borrowing capacity under existing bank facilities, Charter is fully funded through 2004, when most analysts expect it to begin generating free cash flow.

As a result, Bourkoff believes that Charter would be a candidate for rationalizing its systems through purchases of a couple of million subscribers.

"I think they would be one of the more relevant buyers of divested systems out of AT&T, as well as other operators," Bourkoff said. "They would be largely rationalizing existing customers and bolstering existing customers, rather than necessarily entering new areas."

Bourkoff added that AT&T systems in Los Angeles and Dallas-Fort Worth could be logical Charter targets.

In an unrelated move, Charter said it has named two new regional executives to head up its Western and Central divisions.

J. Christian Fenger was promoted to senior vice president of operations for Charter's Western division and William J. Shreffler was named senior vice president of operations for the company's Central division.

Fenger, who had been the Madison, Wisc.-based senior vice president of operations for the North Central Region, replaces James "Trey" Smith, who resigned around the end of the year. Fenger will remain in Madison.

In his new job, Fenger will be responsible for Charter's North Central, Northwest and Western regions, with about 2 million customers.

Smith, who was based in Denver, joined Charter in 2000 from AT&T Broadband, where he was Northwest division president. According to SEC documents, Charter signed Smith to a four-year employment agreement that guaranteed him a $300,000 annual salary, a yearly bonus of up to 40 percent of his base pay and 35,000 shares of restricted stock.

Morgan declined to give specifics regarding Smith's departure.

Shreffler joined Charter in November 1999 as vice president of operations for the Michigan region. In his new position, Shreffler will have responsibility for the company's Central, Michigan and National regions, which serve about 2 million customers.