Charter Tries Hard to Soothe Wall Street

Still smarting from a more than 80 percent drop in its share price this year and a market that has been seemingly indifferent to its growth metrics, Charter Communications Inc. rolled out the big guns for its first-ever investor day last Wednesday.

For six hours, Charter executives including CEO Carl Vogel, addressed what have been pressing issues for the MSO, ranging from high leverage to upgrade costs and the ability to roll out new services.

Charter has been under fire lately because of high debt — about $17.6 billion — and concerns surrounding the way it counts subscribers. Earlier this year the MSO said that it counts some data-only customers as basic-video subscribers, but that it also charges those customers an extra $10 per month for basic-video service whether they take it or not.

In mid-August, the company also revealed that federal prosecutors subpoenaed certain documents from the company related to its current and disconnected customers and its policies and procedures relating to the capitalization or expense of various costs and related matters.

Charter has also been the subject of several class-action suits from shareholders, claiming that company officers made materially false and misleading representations concerning the MSO's financial condition.

Vogel Led Off

Vogel began the conference by telling attendees that the purpose of the meeting was to bring analysts and investors up to date on where Charter stands in its advanced services rollout and offer a financial overview.

"Hopefully you'll come away with a better sense of the company," Vogel said at the gathering. "This is designed so you can ask questions and get a good idea of what we're trying to accomplish."

Later, Vogel addressed the debt issue and pledged to pare down Charter's leverage, but offered little detail on just how much debt the company plans to pay off.

"I plan on reducing debt," Vogel said. "I've been here since October and the debt is an overhang and a distraction to the management team for all the wrong reasons. It's prudent and I think the market is telling us that we probably ought to think about reducing debt."

Later, chief financial officer Kent Kalkwarf said debt reduction will be achieved through free cash flow — which the company hopes to achieve by 2004 — and selling between 400,000 and 600,000 non-strategic subscribers. Free cash flow is defined as earnings after capital expenditures and interest payments are made.

Vogel first said that Charter was considering the asset sales — located in several geographically dispersed systems — at the MSO's Aug. 6 second-quarter conference call. At that time, Vogel said he was looking for a deal that would allow Charter to retain management control and a partial equity interest in the systems.

He also said he would take no less than $3,000 per subscriber for the properties, potentially raising between $1.2 billion and $1.8 billion.

Sales on Track

At the Sept. 4 investor day, Vogel said those potential sales were on track. He said Charter has entered the second phase of due diligence with several interested parties.

While Vogel reiterated that the MSO would only sell the systems at the right price, he added that the company would consider selling the systems outright if the right deal came along.

Vogel said that the structure where Charter would retain management and some ownership has merit in that it would allow the buyer to take advantage of programming cost discounts and efficiencies in billing and oversight. But if an investor believed that they were better suited to run the systems by themselves, "we're open to that as well," he said.

Analysts for the most part were pleased with the presentations and the level of detail Charter provided. But the conference did little to boost Charter's sagging share price. The stock closed at $2.95 on Sept. 4, down 3 cents.

Analysts who attended the meeting left with mixed feelings. While most were encouraged by the near completion of the rebuild cycle, they also were discouraged that the company will likely come in at the low-end of its third-quarter forecasts for revenue, cash flow and growth of revenue-generating units. The company had previously predicted that revenue and cash flow would grow between 13 percent and 15 percent in the third quarter.

"We remain very impressed with Carl Vogel, who we think is a pragmatic, honest leader of this company and has a clear understanding of what investors are expecting," CS First Boston cable analyst Lara Warner said in a voicemail note to clients. "On the negative side, Charter continues to be impacted by negative subscriber-growth trends inflicted by the satellite industry and they indicated that the third quarter continues to be weak."

Upgrade Update

At the conference, senior vice president of engineering John Pietri presented a detailed overview of Charter's upgrade plans. He said the MSO has rebuilt about 94 percent of its systems to 550 megahertz or better in the past year, with completion expected in 2003.

The upgrade was a massive project, involving bandwidth expansion for 113,000 miles of plant and the elimination of nearly 600 headends. Pietri said that three years ago, when the upgrades started, Charter had 1,300 headends in its various markets. That number will be reduced to 749 headends by the end of the year.

Charter has spent about $3.7 billion on the upgrade so far — about $150 million under budget. Vice president of engineering and technology Don Loheide said that the network was built with future needs in mind.

"The biggest question is when we're through, when is the next round of upgrades," Loheide asked. "Hopefully we can convince you we don't have to do that."

He added that Charter has built in sufficient capacity in the system to handle the rollout of new services and that as bandwidth-hungry services become more popular, Charter can reconfigure the network without having to add new equipment.

Vulcan Inc. president Bill Savoy provided little additional insight into his boss Paul Allen's plans for Charter. Earlier this year Allen, also Charter's chairman and largest shareholder, said in a Securities and Exchange Commission filing that he is considering all of his options, including taking the company private or purchasing its public debt.

"We have no plans we need to inform the investment community about," Savoy said.

But he added that at its current trading levels, the debt and equity markets are not valuing Charter fairly and pointed to the large number of Charter management and board members — himself included — who have purchased Charter stock and debt recently.

"I personally believe that the debt and equity of Charter is at an attractive level," Savoy said. "The debt and the equity is priced at a level that presumes Paul Allen is not the majority shareholder of the company. Clearly his position in the company continues to increase as reflected in our [SEC] filings. I think the equity and the debt markets have failed to consider the sponsorship this company has."