January 16, 2009
A debt reorganization by Charter Communications Inc (CHTR.O) could foreshadow a bankruptcy filing and will likely kick off a new wave of U.S. cable consolidation in the next year.
Charter, controlled by Microsoft Corp (MSFT.O) co-founder Paul Allen, said last month it had called in Lazard LLC to negotiate a reorganization of its debt with bondholders.
The fourth-largest U.S. cable operator, Charter is highly leveraged with more than $21 billion of debt on its balance sheet versus a market capitalization of just $57 million. The poor capital structure distorts the valuation, experts say.
For instance, No. 2 U.S. cable company Time Warner Cable Inc (TWC.N), widely acknowledged as a likely buyer of Charter's cable systems, is valued at around $2,400 a subscriber by analysts at Miller Tabak, while Charter's debt load is currently around $4,000 a subscriber.
With that level of debt, Charter is not an attractive acquisition target today. But a reorganization or bankruptcy protection could reduce the load and it could come sooner than some expect.
Charter said on Thursday that it had missed a $73.7 million interest payment, despite having more than $900 million in cash available to make a payment. The company has around $1.9 billion of principal debt due in September 2010. The news prompted Standard & Poor's to cut Charter's corporate rating to 'D' from 'CC'.
"The question is why did they feel they need to do this now when the credit markets are in the worse shape and given that maturities aren't coming through for another 18 months," said David Joyce, an analyst at Miller Tabak.
While it has 30 days before defaulting, the missed payment prompted fear among analysts that Charter might be trying to conserve cash while working out some form of bankruptcy protection.
Canadian telecommunications company Nortel Networks Corp (NT.TO) filed for bankruptcy on Wednesday with more than $2.4 billion of cash that could have been used to meet its interest payments.
"There are concerns that Charter may follow a similar course," said UBS analyst John Hodulik in a client note.
Another issue will be Charter's annual 10K filing with regulators this quarter. Analysts will be heading straight to the auditor's statement to check if the cable operator has been certified as a going concern.
Wall Street fears that a going concern qualification by the auditors will push Charter into bankruptcy because it would likely trigger debt covenants.
Under U.S. companies law, auditors must on a company's annual audit statement say whether the business is viable as a going concern or not.
"The core problem isn't just a liquidity problem, it's a solvency problem," said James Ratcliffe, an analyst at Barclays Capital.
POTENTIAL BIDDERS
If Charter does file for bankruptcy, most long-time cable watchers and insiders expect Time Warner Cable and larger operator Comcast Corp (CMCSA.O) to "do an Adelphia." In 2005, both companies combined to buy up the cable systems of the bankrupt Adelphia, which made sense for their respective operations.
The complicated Adelphia transaction, which included swaps of cable systems, took nearly two years to clear through bankruptcy courts and regulators. But that time frame will suit Time Warner Cable, which has added $10 billion in debt to pay shareholders of Time Warner Inc (TWX.N) a special dividend. Time Warner Cable will likely not be in a position to make any major acquisitions till 2010.
With cable systems in 28 states serving more than 5 million subscribers, Charter has plenty of assets to interest cable companies. People familiar with Time Warner Cable's plans say it would be interested in Charter's asset in the Los Angeles area and South Carolina, where it already has operations.
Comcast might be interested in Charter's New England systems where Comcast also has a presence.
The tight credit market also means there is less likelihood of much competition from non-strategic buyers such as private equity.
Reuters
By Yinka Adegoke - Analysis
A debt reorganization by Charter Communications Inc (CHTR.O) could foreshadow a bankruptcy filing and will likely kick off a new wave of U.S. cable consolidation in the next year.
Charter, controlled by Microsoft Corp (MSFT.O) co-founder Paul Allen, said last month it had called in Lazard LLC to negotiate a reorganization of its debt with bondholders.
The fourth-largest U.S. cable operator, Charter is highly leveraged with more than $21 billion of debt on its balance sheet versus a market capitalization of just $57 million. The poor capital structure distorts the valuation, experts say.
For instance, No. 2 U.S. cable company Time Warner Cable Inc (TWC.N), widely acknowledged as a likely buyer of Charter's cable systems, is valued at around $2,400 a subscriber by analysts at Miller Tabak, while Charter's debt load is currently around $4,000 a subscriber.
With that level of debt, Charter is not an attractive acquisition target today. But a reorganization or bankruptcy protection could reduce the load and it could come sooner than some expect.
Charter said on Thursday that it had missed a $73.7 million interest payment, despite having more than $900 million in cash available to make a payment. The company has around $1.9 billion of principal debt due in September 2010. The news prompted Standard & Poor's to cut Charter's corporate rating to 'D' from 'CC'.
"The question is why did they feel they need to do this now when the credit markets are in the worse shape and given that maturities aren't coming through for another 18 months," said David Joyce, an analyst at Miller Tabak.
While it has 30 days before defaulting, the missed payment prompted fear among analysts that Charter might be trying to conserve cash while working out some form of bankruptcy protection.
Canadian telecommunications company Nortel Networks Corp (NT.TO) filed for bankruptcy on Wednesday with more than $2.4 billion of cash that could have been used to meet its interest payments.
"There are concerns that Charter may follow a similar course," said UBS analyst John Hodulik in a client note.
Another issue will be Charter's annual 10K filing with regulators this quarter. Analysts will be heading straight to the auditor's statement to check if the cable operator has been certified as a going concern.
Wall Street fears that a going concern qualification by the auditors will push Charter into bankruptcy because it would likely trigger debt covenants.
Under U.S. companies law, auditors must on a company's annual audit statement say whether the business is viable as a going concern or not.
"The core problem isn't just a liquidity problem, it's a solvency problem," said James Ratcliffe, an analyst at Barclays Capital.
POTENTIAL BIDDERS
If Charter does file for bankruptcy, most long-time cable watchers and insiders expect Time Warner Cable and larger operator Comcast Corp (CMCSA.O) to "do an Adelphia." In 2005, both companies combined to buy up the cable systems of the bankrupt Adelphia, which made sense for their respective operations.
The complicated Adelphia transaction, which included swaps of cable systems, took nearly two years to clear through bankruptcy courts and regulators. But that time frame will suit Time Warner Cable, which has added $10 billion in debt to pay shareholders of Time Warner Inc (TWX.N) a special dividend. Time Warner Cable will likely not be in a position to make any major acquisitions till 2010.
With cable systems in 28 states serving more than 5 million subscribers, Charter has plenty of assets to interest cable companies. People familiar with Time Warner Cable's plans say it would be interested in Charter's asset in the Los Angeles area and South Carolina, where it already has operations.
Comcast might be interested in Charter's New England systems where Comcast also has a presence.
The tight credit market also means there is less likelihood of much competition from non-strategic buyers such as private equity.
Reuters
By Yinka Adegoke - Analysis
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