Microsoft Founder's Cable Company in a debt Bind

By: Deborah Yao
By: Deborah Yao

Microsoft Corp. co-founder Paul Allen has seen his massive investment in cable TV operator Charter Communications Inc. all but vanish.

Charter was Allen's biggest investment after he left Microsoft in 1983. He is Charter's chairman and holds a 51 percent stake in the company, which is the nation's fourth-largest cable operator, with 5.5 million customers in 27 states.

But the stock is now 8 cents per share, down from an all-time high of $27.75 reached a few days after its initial public offering in 1999. The St. Louis-based cable company is facing bankruptcy, analysts said.

Allen wouldn't comment, and neither would Charter, other than a statement from Chief Executive Neil Smit, who said the company is continuing to negotiate with its bondholders. Analysts said Charter is likely to try rolling over its debt into new loans payable later, or swapping its debt for equity in the company.

Charter has been skirting insolvency for years, but this time it faces a brutal combination of tight credit and billions of debt coming due.

The company missed a debt payment this month, and about $1.9 billion of debt comes due next year. Overall, more than half of Charter's $21 billion in total borrowings will mature by 2013.

Tuna Amobi, an analyst with Standard & Poor's, doesn't think it likely that Allen will pump in more money. And selling off assets would be tough, because Charter is unlikely to get a good price in this down market. Charter itself acknowledged in a Securities and Exchange Commission filing that if it can't refinance its debt, it could be forced to seek bankruptcy protection.

Allen, 56, who started Microsoft with Bill Gates in 1975, once ranked as the world's third-richest person, with a $30 billion fortune in 1999, according to Forbes magazine. But he has had a mixed record as an investor, which is reflected in his decline on the Forbes rich list. Last year Allen was No. 41, with an estimated $16 billion in holdings.

Allen has plowed his money into such diverse targets as DreamWorks SKG, the Seattle Seahawks and the Science Fiction Museum and Hall of Fame. He had success with USA Networks and CNET, and failures with Priceline, Egghead.com and online retailer Value America. But Charter may be his biggest disappointment.

Allen's vision for his cable holdings began with high hopes. In the spring of 1998, he bought Marcus Cable Co. for $2.8 billion, and a month later he paid $4.5 billion for Charter, which would eventually acquire Marcus.

At the time, he said: "For over 20 years, I have been talking about and investing in the `wired world,' a connected future marked by the merger of high-bandwidth data channels, the power of the personal computer, and the availability of compelling content."

"I will finally have some wires for my wired world," he later added.

But Charter has never made a profit since at least 1999, when it went public. Its earnings were wiped out by large interest payments on the debts it incurred largely in the acquisitions it used to expand.

It's had other missteps. In 2004 and 2005, four former executives pleaded guilty to scheming to inflate revenue, cash flow and subscriber rolls. The company settled ensuing shareholder lawsuits for $144 million in cash and stock.

In 2005, Charter's CEO, Carl Vogel, resigned in the wake of big losses. He returned to Dish Network Corp., the satellite TV provider he co-founded and now serves as vice chairman.

To deal with all its borrowings, Charter developed an unusual "wedding cake" structure, with layers of holding companies that each took on debt at varying interest rates to keep Charter itself liquid. Otherwise, the company would have defaulted on loans years ago, said Russ Solomon, an analyst with Moody's Investors Service.

Still, Charter's purse strings remained relatively tight. As other big cable operators were investing in ways to offer high-speed Internet, phone service and high-definition TV - enabling a "triple play" package that makes consumers more likely to stick - Charter at first fell behind.

Recently, Charter showed signs of recovery, once it got its own triple play going. In the third quarter, customers signed up for 205,400 new lines of service, up 50 percent from a year earlier. Subscribers on average paid $106 per month, up 11 percent from the previous year.

And Charter nearly doubled its operating income in the quarter, to $208 million.

But it was wiped out by $478 million of interest expenses on its debt.

The financial crisis and the resulting credit crunch made matters worse. The company couldn't count on the same ease in refinancing as it enjoyed in prior years.

On Jan. 15, Charter announced that two subsidiaries missed $73.7 million in interest payments. The payments have a 30-day grace period.

Now, Solomon believes that since Charter has several groups of creditors with which to negotiate, the company might have little choice but to do it through bankruptcy court. Charter is likely to file a "pre-emptive restructuring," line up agreements with bondholders, enter Chapter 11 and emerge quickly, Solomon said.

Some of Allen's dreams for the cable business were shared by Gates. Microsoft invested $1 billion in Comcast Corp. in 1997, which went on to become the nation's biggest cable company. Five years later, Microsoft got even more Comcast stock in exchange for its $5 billion stake in AT&T Broadband, which Comcast bought.

But cable seems to have lost its allure for Gates - Microsoft recently liquidated all of its shares in Comcast. Now it might well be the same for Allen.

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