To get a clear idea of the condition of Charter Communications, you need only look at the $1.32 stock price. But the problems at mega-billionaire Paul Allen's company are bigger than just a depressed stock: No one is running the show.
Charter has sustained a nearly clean sweep of its executive suites. The company has no permanent CEO. CFO Derek Chang exited last Friday. (Even he was merely an interim CFO, replacing an executive who left in August.) The COO slot was filled just two weeks ago, after being open for six months. Other recent departures include the chief marketing and technology officers.
It could take months for a new set of executives to come together, get the lay of the land and significantly reverse Charter's loss of customers and boost its trickling cash flow.
This is bad news for Allen. The cable operator was a favorite plaything in his platinum-plated sandbox, with the Microsoft co-founder personally investing $7.2 billion and borrowing billions more to rapidly scoop up systems.
Allen's Wired World
Charter was supposed to be the cornerstone of the vision Allen has talked about since the 1980s: that of a Wired World, connecting average consumers through a broadband pipe to a variety of information and communications services. That is why he dove into cable and made dozens of other, smaller investments, many of which went bust.
Charter does have a solid temp in the top slot: interim CEO Bob May. A Charter board member, longtime FedEx executive and onetime COO of Cablevision Systems, May was in the right place at the right time. Allen, chairman and Charter's controlling shareholder, asked May to pinch-hit in the wake of ex-CEO Carl Vogel's resignation in March.
In 2003, May was tapped to help keep notorious hospital and health-care company HealthSouth out of Chapter 11. The company was reeling from charges that flamboyant former CEO Richard Scrushy was cooking the books in ways that gave him tens of millions of dollars in bonuses.
At the time, HealthSouth was on the precipice of bankruptcy and had no cash to keep the show going. Keeping up-to-the-minute on the financial crisis was a special struggle. “Every other day, I'd go for somebody, and be told, 'They're down at the attorney general's office, and they won't be back to work,'” May recalls.
Scrushy is on trial over fraud charges, and several of his lieutenants are cooperating with prosecutors.
Certainly, there are some similarities at Charter: tremendous debt load, accounting fraud and executives facing criminal charges. Still, May finds Charter a much better situation than HealthSouth. “That was ashes,” May says. “This is better; this is about getting after the fundamentals of the business.”
Some outsiders agree. UBS Warburg's Aryeh Bourkoff believes the risk of Chapter 11 is now small. “Basically, the company has to set an operating plan in place, something that should have been done a few years ago.”
May is loathe to openly criticize Vogel and his executives but contends that Charter hasn't paid enough attention to essential blocking and tackling —like marketing, smooth customer-service operation, efficient installation and repair services.
In a lengthy interview, May alluded to the Vogel regime only vaguely: “This is work, this isn't deal-doing.” Translation: Vogel was concentrating too much on restructuring Charter's debt and not enough on the nuts and bolts.
That position, of course, infuriates former Charter executives. From their perspective, Charter was crippled by Allen at the outset. He was interested primarily in building a big operation rather than a sensible one. In 17 acquisitions between 1999 and 2001, he spent $16 billion on companies like Falcon Cable, Bresnan Communications and Helicon, which primarily served small towns scattered across the country.
Focus on Debt
Consequently, Allen had few geographic clusters in the major markets that are best-suited to successfully launch and sell advanced services. And most needed expensive rebuilds. So Charter wound up with sub-par assets on which Allen loaded too much debt.
Vogel's team wasn't around when Allen was amassing all those subscribers. The federal prosecutors arrived shortly after Vogel did in 2001, ultimately indicting four senior Charter executives.
It was difficult to stay focused on operations when the company was in danger of violating loan covenants every quarter. Vogel's team had to focus on restructuring $9 billion in debt over the past 18 months in order to keep Charter out of Chapter 11.
But the damage shows. Charter is seeing heavy churn in more places than the executive suite. Its systems are suffering the same problem. More than 100,000 customers fled Charter last year, bringing the total lost since 2001 to 500,000.
Most of those have gone to the welcoming arms of DBS operators, which specifically target Charter systems with extra advertising and special promotions because they see them as ripe for the plucking. (They love Adelphia Communications systems, too.)
Stabilizing the operations will be the first step in dealing with Charter's debt problems. Allen—who is still worth $22 billion—says he won't consider putting any more money into Charter until he sees some operating vitality.
Search for CEO
That job might not fall to May. Charter's board still has a search committee hunting for candidates. But as one Charter executive said, “Bob's not acting like he's 'interim'; he acts like he's here to stay.” However, industry executives say Cablevision COO Tom Rutledge is a favorite recruiting target of Charter's directors.
The irony is that Paul Allen's Wired World vision is far from folly. Cable operators are pretty much deploying the concept today, with products like video-on-demand, digital video recorders and VoIP telephone. But Charter's financial crunch means that Allen is a laggard, not a leader. It is Comcast, Cox and Cablevision that are delivering.
Which just goes to show: Immense wealth can't buy you the ability to execute your own vision.
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