The surprise announcement that Charter Communications CEO Neil Smit is making the leap to head up cable operations at Comcast could signal that the St. Louis-based operator might be open to some dealmaking in the not-too-distant future.
Smit, who joined Charter in 2005, is largely credited with turning that debt-laden ship around, steering the company toward solid operating performance and leading the St. Louis-based MSO through the Chapter 11 bankruptcy process last year.
But Smit, who will join Comcast as president of cable communications on March 1, was either reluctant or unable, because of Charter's heavy $21 billion debt load (since reduced to about $13 billion), to make a big deal splash. That could change under new management.
Charter said it is on the hunt for a new CEO — it appointed chief operating officer Mike Lovett in the interim — but has made several changes to its board of directors over the past several months, adding representatives from its largest bondholders. Late last year, Apollo Management partner Eric Zinterhofer became board chairman, displacing Paul Allen, who remains Charter's largest individual shareholder. Apollo is Charter's largest bondholder.
Under Smit, Charter sold about 350,000 subscribers in three separate deals in 2006, but so far has been unable to pull the trigger on the big one.
Some were discussed, though. Last year, during testimony at Charter's bankruptcy hearings, Smit revealed “Project Cosmos,” a plan to monetize its net operating loss carry-forwards (NOLs), and said Charter held talks with Comcast and Time Warner Cable about a possible deal that never came to pass.
Analysts have said one way to monetize NOLs is to attach them to systems and then sell them.
“I think it's going to be a different management style,” one executive in the cable financial community, who asked not to be named, said. “I think they are going to be much more open to value enhancement through deals and swaps.”
Collins Stewart media analyst Tom Eagan said that more systems swaps could be on the horizon. “We thought it would make sense for various Charter systems to be sold,” Eagan said. “We wouldn't be surprised to see that.”
Obvious targets for swaps or sales include Charter's systems in Southern California (376,000 customers), Texas (159,000 customers) and New England (336,000 subscribers), which would be attractive to Time Warner Cable and Comcast, respectively.
For Comcast, the move allows chief operating officer Steve Burke to concentrate more fully on programming — especially its pending joint venture with NBC Universal.
“We believe Smit is an exciting hire,” Citigroup media analyst Jason Bazinet wrote in a research note. “Mr. Smit is a very capable executive that brought a new level of analytic rigor to the job. That rigor translated into sharply improved operating and financial results.”
The former Navy SEAL and AOL executive joined Charter in August 2005, and that year the cable operator reported revenue of $5.25 billion (up 5.6%) and cash flow of $1.9 billion (flat compared to the prior year).
By the end of 2008, the latest full year available, Charter's revenue grew to $6.5 billion (up 8.5%) and cash flow was $2.3 billion (up 10.3%).
Smit will report directly to Burke. Burke's direct reports on the operations side — executive vice president of operations Dave Watson, EVP of finance and administration Dave Scott, EVP of national engineering and technology operations John Schanz, EVP and chief technology officer Tony Werner, EVP of human resources Ken Carrig and EVP of content acquisition Madison Bond — will report to Smit.
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