The Wall Street Journal published a piece last week (WSJ Subscription required) quite critical of Charter Communications and its big-name backer, Paul Allen of Microsoft fame. Among other criticisms the article points out:
Since leaving Microsoft two decades ago, Mr. Allen has struggled to dispel the notion that he owes his wealth solely to his prep-school camaraderie with Bill Gates. During the dot-com mania he dropped billions into the Internet, tech and telecom sectors -- in firms ranging from Priceline.com Inc. to broadband group RCN Corp. -- with little to show for it.
Now one of his biggest bets, in the cable business, has been dealt a blow. AT&T Inc.'s takeover of BellSouth Corp. raises the competitive ante for all cable operators. None are as feeble as Mr. Allen's Charter Communications Inc. Its $20 billion of debt is 50 times the market value of its stock ($409 million). Mr. Allen's 58% stake is worth $250 million, a far cry from the $7 billion-plus he spent buying Charter and Marcus Cable back in 1998.
Mr. Allen's company is in poor shape for a fight. Last year interest payments of $1.8 billion nearly matched its cash flow as measured by earnings before interest, tax, depreciation and amortization. To cope, it has refinanced debt and shed some cable assets. This financial weakness may explain why Verizon chose a Charter market in Texas to launch its TV services. Charter halved prices in response, but Verizon still nabbed a quarter of the market.
Any other company in Charter's condition would probably seek bankruptcy protection. But that would wipe out the bachelor billionaire's interest, with possible tax implications for his investment firm, Vulcan Ventures.
Is it wrong of me to be amused by these college-degreeless one trick ponies who made their billions in the tech bubble, name their investment vehicles after Star Wars and Star Trek terms and are slowly discovering that an internet baron is about as useful to business as an A-List celebrity is to a health care and foreign policy debate?
My advice? When you hit 23 black on the roulette table on your first try and get a 35 to 1 payout, leave the casino and dump the money into t-bills.
The debt piece of this discussion is interesting. I have commented before on the slow dilution of convenant pieces on large debt pieces in response to a booming market for debt. Interesting then that the Wall Street Journal highlights the fact that S&P discontinued their covenant rankings product back in the 1990s. I wonder, if they made a revival, what sort of rating would Charter get?
-ep
