Liberty Buys 27% Interest in Charter

As expected, Liberty Media said Tuesday that it has agreed to purchase 26.9 million shares of common stock and 1.1 million warrants from three Charter Communications shareholders for $2.617 billion, giving the Denver-based media giant the largest individual stake in the mid-market MSO.

Liberty will purchase the stakes from Apollo Management, Oaktree Capital Management and Crestview Partners, for a price of about $95.50 per share. As a result, Liberty will become Charter’s largest individual shareholder with 27.3% of its outstanding shares. As part of the agreement, Liberty also received the right to elect four members of Charter’s 11-member board of directors and has agreed not to raise its stake above 35% before January 2016 or above 39.99% thereafter.

Liberty said it would fund the deal through a combination of cash on hand and new loan arrangements. The Wall Street Journal first reported the two were considering a transaction in a report Monday.  

Liberty stock soared more than 10% after the Journal story broke, closing at $98.04 on Monday up 8.8% or $7.95 each. The stock continued to rise Tuesday, up $1.18 each (1.2%) in early trading to $99.22 per share.    

The deal seems to herald a return to the U.S. cable market for Liberty chairman John Malone, who had focused most of his attention on the European cable market after selling his Tele-Communications Inc. to AT&T in 1999. Malone also is chairman of Liberty Global, the largest cable operator in Europe with systems in more than 13 countries. Liberty Media, which was basically held programming assets the TCI sale in 1999, has gone through several changes and splits, creating two new tracking stocks (Liberty Interactive and Liberty Ventures) from Liberty Interactive in 2012,  spinning off its Starz premium channel earlier this year and Liberty Media, consisting mainly of interests in satellite radio giant XM Sirius, book retailer Barnes & Noble and holdings in Viacom and Time Warner Inc.

Charter has been through some changes too. In December 2011 it hired former Cablevision chief operating officer Tom Rutledge as its new CEO, who then peppered the management team with several former Cablevision executives. Charter, which emerged from Chapter 11 bankruptcy protection in 2009 with a clean balance sheet, has been considered to have the greatest growth potential in the industry, primarily because of its industry-low penetration rates.

In the past year Rutledge has revamped Charter’s channel packages and offerings, eliminated entry-level high-speed data tiers and focused on improving customer service.

“We are excited to make this investment in Charter, the fourth largest cable provider in the US,” said Liberty Media CEO Greg Maffei in a statement, Liberty President and CEO. “Tom Rutledge and his team have done an impressive job of turning around Charter’s operations and improving its financial position. We look forward to working with Charter’s management team and fellow board members in the future.”

Malone also seemed pleased with Charter’s recent performance.

“We are pleased with Charter’s market position and growth opportunities and believe that the company’s investments in its high-capacity digital network which provides digital HD and on demand television, high-speed data and voice, will benefit its customers and shareholders alike,” Malone said in statement.

ISI Group media analysts Vijay Jayant and David Joyce added in a research note that they believed even though Liberty has agreed to keep its stake below 40% for the foreseeable future, its past history has shown that has not been an obstacle for the media giant.

“Taking a page from prior playbooks in which [Liberty Media] bought significant minority stakes then maneuvered to control in time -- an initial 35% stake in DirecTV turned into ~53% at the time of its reverse Morris Trust; an initial 40% as converted stake in Sirius is now 50%+ -- we believe, if this purchase comes to fruition, that within a few years the Liberty Media holding in Charter could likewise expand to over 50%,” the analysts wrote.

Jayant and Joyce also believe that Charter could become a vehicle for Malone to consolidate the U.S. cable business, acquiring smaller market MSOs across the country.

“We foresee plenty of scale opportunities for geographically-contiguous system swaps and acquisitions over time, given the broad Charter footprint,” Jayant and Joyce wrote.

Liberty said it will name Malone, Maffei, Balan Nair, EVP and chief technology officer of Liberty Global; and Michael Huseby, chief financial officer of Barnes & Noble to Charter’s board of directors. Jeffrey Marcus, a partner at Crestview, will remain on the board.

After the transaction is closed, expected in the first half of the second quarter of this year, Crestview will own 7.4% of Charter stock and Oaktree will hold 2.2%.  

“This transaction reflects a solid endorsement of the strategy that Tom Rutledge and his team are implementing at Charter,” said Eric Zinterhofer, Chairman of Charter. “Apollo, Oaktree, and Crestview have created substantial value for Charter and its shareholders, and on behalf of Charter’s board, we look forward to working with Liberty Media in creating further value.”

Malone and Rutledge have worked together before – Malone had served as a director of Cablevision in the past – and the two are expected to play well together,  

 “Liberty Media and John Malone have a well proven track record in our industry and in creating shareholder value,” Rutledge said in a statement. “While we have made real progress, we are still in the beginning of our effort to transform Charter, and we welcome the addition of Liberty Media as knowledgeable shareholders as we grow our products, service capabilities, and market share. All of us at Charter appreciate the contributions of Apollo, Oaktree and Crestview which put us on a path for sustainable success.”

Liberty Media was advised by LionTree Advisors and Baker Botts L.L.P. Charter was advised by Kirkland & Ellis LLP. Apollo was advised by Citi and Wachtell, Lipton, Rosen & Katz. Oaktree was advised by Citi, Goldman Sachs and Paul, Weiss, Rifkind, Wharton & Garrison LLP. Crestview was advised by Davis Polk & Wardwell LLP.