Charter Readying L.A. System For Sale?

Charter Communications is setting the wheels in motion for a sale of its Los Angeles system, lining up investment bankers to handle the auction for the properties which could attract upwards of $2 billion, according to sources familiar with the company.

Speculation surrounding Charter's Los Angeles area systems has been around for years. But according to sources familiar with the company, Charter had tried to engineer a swap with Time Warner Cable involving the Los Angeles properties - which including L.A. and outlying areas have about 551,000 customers - but could not reach an agreement. The decision to begin interviewing bankers stemmed from its inability to reach an agreement with Time Warner Cable, those sources said.

According to several sources in the cable investment community, Charter had tried to engineer a swap for Time Warner Cable's Wisconsin systems, but the second largest MSO in the country, which has about 560,000 subscribers in Green Bay, Milwaukee and Appleton, balked. Charter has about 537,000 customers in Wisconsin.
"This is an attempt to get Time Warner to step up and do something," said one cable executive who asked not to be named.
Time Warner Cable declined comment.
Charter also declined to comment, citing its policy concerning rumor and speculation.

"Consistent with what we've done in the past, we are not commenting on speculative transactions," Charter spokeswoman Anita Lamont said.

Sources said while it is unclear whether Charter has actually hired a banker to handle the auction or is still interviewing candidates, one of the frontrunners is likely UBS, which advised Charter through its Chapter 11 bankruptcy in 2009. UBS also is one of the bankers handling the auction of Insight Communications.

Time Warner Cable, with about 1.8 million customers in the L.A. market, would be the obvious buyer for Charter's system there. According to another executive familiar with the situation, Charter is also considering including its Fort Worth, Texas system (with about 178,000 customers) in the auction, which could make the deal even more attractive to Time Warner. Time Warner Cable has about 600,000 customers in Dallas.

But Time Warner Cable also is the most logical buyer for Insight's 691,000 customers in Indiana, Kentucky and Ohio. While Time Warner Cable has reportedly balked at Insight's asking price - between $3 .5 billion and $4 billion - it may be interested if the price were to fall to a more reasonable level. Tacking on a Charter acquisition may prove too much to swallow, however.
One analyst who asked not to be named said another factor could be Time Warner Cable's unwillingness to get involved in another large cable deal. He noted that the MSO had major integration issues regarding Los Angeles and Dallas when it acquired them from Adelphia in 2006.
"They didn't have a great experience when they purchased L.A. and Dallas the last time," the analyst said. "The question is whether the integration headaches have been ironed out."
The analyst also noted that with Time Warner Cable aggressive shareholder return strategy - it has a $4 billion share repurchase program and recently increased its quarterly dividend by 20% -- there may not be room for a big cable deal.

And a Charter deal could be pricey. Sources familiar with the matter said that the Charter systems could attract between $2 billion and $2.5 billion in an auction. In a research note published last year, Miller Tabak media analyst David Joyce estimated that Charter L.A. could be worth between $1.2 billion to $1.85 billion. Fort Worth, Joyce estimated could attract between $600 million and $900 million, which could push the combined price to between $1.8 billion and $2.75 billion.

While Time Warner appears to be the most logical buyer, the systems make sense for other strategic and financial suitors. Comcast, though it has no systems in L.A. - it shed the operations it had there after it jointly purchased Adelphia Communications with Time Warner Cable in 2006 - it may be interested in a foothold in the market for sports rights and for its NBC Universal owned broadcast TV markets in the area. The Pac-12 is reportedly looking to launch its own college sports network and L.A. would help fill in a gap in Comcast's coverage of the state. Other possible strategic buyers include Cox Communications (which owns systems in nearby San Diego) and Cablevision Systems, which let its appetite for systems outside the New York area be known last year when it purchased Bresnan Communications for $1.365 billion.
In addition, financial players like private equity firm ABRY Partners and others have shown interest in cable properties in the past.