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Vogel Wants Allen to Buy Charter Debt

Charter Communications Inc. stock was pummeled last week after the company said it would reduce its revenue and cash-flow guidance for the third quarter.

But while Charter stock hit an all-time low of $1.51 per share last week, sources familiar with the company said CEO Carl Vogel has a plan to revitalize the sluggish shares — and it involves the company's billionaire chairman.

According to sources, Vogel is set to meet with Charter chairman and largest single shareholder Paul Allen this week to convince the Microsoft Corp. co-founder to make a significant investment in Charter public debt.

Vogel alluded to the plan at the Goldman Sachs & Co. Communacopia conference Oct. 1 in New York.

During his presentation, Vogel reiterated a statement made by Allen advisor Bill Savoy at Charter's investor-day meeting in September. Savoy, president of Vulcan Ventures — Allen's personal investment vehicle — and a Charter board member, complained that day that Wall Street did not give the company credit for the support of Allen, its biggest stockholder.

After quoting Savoy's comments at the Goldman conference, Vogel said, "I know the first question is 'Show me the money' and I too agree with that. I can tell you that we're focused on trying to put together a financing that may give us an opportunity to take advantage of some of the balance-sheet issues that we have. I can't give you any degree of certainty on that. But as management, that is something that is very top of mind for us."

Pitch to buy debt

After his presentation, Vogel declined to elaborate.

But sources familiar with the company said Vogel is set to press Allen hard about making a substantial debt purchase, possibly around $500 million of Charter's outstanding 8.625 percent bonds.

Since those bonds are trading at about 50 cents on the dollar, a purchase of that size could wipe out about $1 billion of Charter's $17.5 billion in debt.

That would lower Charter's leverage ratio — net debt divided by annualized 2002 cash flow — from its current 8.7 times to about 8 times.

Wall Street has been hoping for months that Allen would step up to the plate and help retire some of the company's debt, which has been a major drain on the stock. Charter stock has declined more than 80 percent this year.

Allen, the third-richest American with a personal fortune Forbes
magazine has estimated at $21 billion, apparently could afford to buy more Charter debt.

Already, according to Securities and Exchange Commission filings, Allen and other Charter executives have purchased Charter stock and bonds totaling about $25 million.

Allen said in a securities filing in August that he was considering his options with the company, including taking it private.

But he might be constrained by some other obligations. According to UBS Warburg cable analyst Aryeh Bourkoff, Allen has agreed to fund about $718 million in put rights resulting from Charter's acquisition of several former AT&T Broadband systems. In a research note, Bourkoff wrote that AT&T Comcast plans to exercise those put rights in April 2003.

That $718 million cash obligation, coupled with a $500 million debt purchase, would amount to about 6 percent of Allen's personal net worth.

Bourkoff said the AT&T Comcast obligation, plus an ongoing federal investigation into Charter's accounting practices, could preclude Allen from buying additional Charter debt.

"My view is that Paul Allen would be reluctant to employ a capital structure fix at Charter while the Justice Department investigation is going on," Bourkoff said.

But, should Allen decide to buy Charter debt, that would help the MSO, Bourkoff said. "I don't think that fixes the company's problems. But it would be a significant endorsement for the company, which I think Wall Street has been looking for. I think it would be a very big positive."

Forecasts downsized

Charter has been struggling this year as it has tried to push non-paying subscribers off its rolls and strengthen its balance sheet.

At the conference, Charter chief financial officer Kent Kalkwarf said revenue growth in the third quarter would be about 13 percent — at the low end of its previous guidance range — and that it would miss earlier targets of 14 percent cash-flow growth for the period.

Charter had expected revenue of between $1.19 billion and $1.2 billion, or between 13 percent and 14.6 percent growth in the third quarter. The company also earlier predicted that cash flow would rise between 14 percent and 16 percent in the period.

"I don't believe we will hit 14 percent [cash-flow growth]," Kalkwarf said at the conference.

At the heart of the decline is an expected falloff in basic subscribers in the quarter. Charter did not say how many customers it expects to lose in the third quarter, but CS First Boston analyst Lara Warner in a research report estimated Charter's third-quarter subscriber count would be about 16,000 below the number that ended the second quarter. She estimated Charter would finish the year with 6.759 million customers, a decline of about 3 percent, or 154,000 subscribers.

Vogel said that Charter is making moves to improve customer retention and plans to start tests of a subscription video-on-demand service in the fourth quarter to help further drive revenue.

He also said the company's three-tiered high-speed data service has been extremely popular and has helped improve penetration for other services.

"More market share reduces churn," Vogel said.