Cable Operators

Can Rutledge Replay His Magic at Charter?

1/02/2012 12:01 AM Eastern

Charter Communications scored a major coup
on Dec. 19 in enticing what many analysts have called the
top operations executive in the industry — Tom Rutledge
— to become its new CEO.

And though early speculation has centered on why Rutledge
left his post as Cablevision Systems’ chief operating
officer for Charter, the biggest question for the industry
veteran may be whether he can work the same magic in
St. Louis that he did in Bethpage, N.Y.

Rutledge is widely credited with transforming Cablevision
— where he was the No. 2 executive at the familycontrolled
company, behind CEO James Dolan — into an
industry powerhouse. In the nearly 10 years that he ran cable
operations for the No. 5 U.S. MSO, it has led the industry
in every operational metric by a wide margin, including
basic-video penetration (59%), high-speed Internet penetration
(53%); and phone penetration (54%), despite having
the greatest exposure in the industry to the most-aggressive
telco competitor, Verizon Communications’ FiOS TV.

BIG JOB AHEAD

Now at Charter, the No. 4 U.S. cable operator, Rutledge
faces his biggest challenge yet. While Cablevision concentrated
on the largest media market in the country — its
3.3 million customers are located mainly in the New York
City metropolitan area — Charter has about 4 million customers
scattered across 25 states. While Cablevision led
the industry in basically every penetration metric, Charter
has been among the lowest: It lags the rest of the industry
in basic video penetration (35%), high-speed Internet
penetration (29.5%), residential phone penetration (16.3%)
and digital penetration (77.8%).

“Mr. Rutledge has proven the naysayers wrong in the
past, but the question remains whether his new adventure
might be a case of biting off even more than he can chew,”
ISI Group media analyst Vijay Jayant wrote shortly after
Charter announced the Rutledge hire, adding parenthetically,
“And he’s got a pretty strong jaw.”

“Yet given Mr. Rutledge’s decision to take on the ‘Charter
Challenge’ — in one of the toughest cities in the U.S.,
mind you — is indicative to us that at 58 years old, he’s got
plenty of fight in him,” Jayant added.

While Rutledge managed to work magic on Cablevision
— when he started in 2002, high-speed Internet penetration
was just 17% — he had the advantage of operating primarily
in a single market with a large number of affluent
customers. At Charter, his biggest region is Michigan, with
about 630,300 customers, followed by Alabama and Georgia,
with 588,900 subscribers.

In announcing the appointment, Charter chairman Eric
Zinterhofer said hiring Rutledge was the result of a comprehensive
search process — current CEO Mike Lovett had
announced in October his intention to step down by April
30 of this year — and praised the former Cablevision executive’s
accomplishments and past track record.

“He has the rare combination of operational expertise
and strategic vision to lead Charter through its promising
next phase of growth,” Zinterhofer said in a statement.

Rutledge noted Charter’s strong assets, growth prospects
and employees in the same statement, adding that
he looked forward to “working with the Charter team to
provide superior products and services to our customers,
create an exciting work environment for our employees
and build continued value for our shareholders.”

Wall Street was more than pleased with Rutledge joining
Charter — some analysts are expecting former Cablevision
president of cable operations John Bickham, who
resigned in November, to eventually join his former boss.

Just what prompted Rutledge to decide to leave Cablevision
has been a popular industry guessing game, and the
theories — none confirmed — are rampant: Rutledge
clashed with Dolan’s wife Kristin, a senior Cablevision
executive (which Cablevision has denied); Rutledge was
upset at Bickham’s dismissal; clashes with Dolan himself;
or perhaps a realization that, with Cablevision’s biggest
growth days behind it, it was time to move on.

Cablevision said it would not comment on Rutledge’s leaving
beyond the Dec. 15 release announcing his departure.

CULTURAL DIFFERENCES

Whatever his reasons for leaving, Rutledge will face a different
management situation at Charter — instead of being familydominated
like Cablevision, Charter is controlled by privateequity
players (Apollo Capital Management and Oaktree
Capital Management). And unlike the Dolan family, Charter
management has also toyed with selling assets. It hired investment
bankers last year to shop its Los Angeles-area systems,
only to pull them off the auction block a few months later.

According to documents filed with the Securities and
Exchange Commission, Rutledge signed a four-year employment
deal that will give him a $2 million annual salary,
an annual bonus worth up to $3.5 million per year,
and stock options and awards for 1.26 million shares that
could be worth more than $70 million over four years. All
together, the compensation package could net Rutledge
more than $92 million over the life of the agreement.

In contrast, Rutledge received about $28.2 million in total
compensation from Cablevision in 2010. Since 2008, he
has averaged about $21.7 million per year in total compensation
from the MSO.

Investors also were cheered by Rutledge’s hiring. Charter
stock was up 6.4% ($3.40 per share) between Dec. 19
and Dec. 27. Cablevision was hit hard after the news of
Rutledge’s departure — the stock dropped 8.5% ($1.18
each) on Dec. 16, but has since rallied, closing at $14.44
per share on Dec. 27.

September