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Cable Operators

Turmoil At the Top

1/23/2005 7:00 PM Eastern

The cable industry’s year is starting out with unusual turmoil among the top ranks of several its top companies.

Last week, Charter Communications Inc. CEO Carl Vogel, after months of speculation, agreed to resign in the face of poor financial and operational performance at the nation’s fourth-biggest cable company.

Vogel’s resignation comes on the heels of early retirements of two top executives at Time Warner Cable — vice chairman John Billock and president Tom Baxter — who left the No. 2 MSO after an internal review recommended combining the positions of president and chief operating officer.

And on Jan. 18, Cablevision Systems Corp. CEO James Dolan won a boardroom showdown with his father — chairman and visionary cable executive Charles Dolan — over the fate of its troubled Rainbow DBS direct-broadcast satellite subsidiary. All that and it’s still January.

Vogel’s announcement came on Jan. 18, and Charter immediately named board member and former Cablevision chief operating officer Robert May as interim CEO. A search for a permanent CEO is ongoing and Charter said it would hire an executive search firm.

Vogel’s departure wasn’t a surprise: He has been dropping hints about leaving for months. The separation was characterized as a mutual agreement, but Charter said the decision was prompted by its poor operational performance over the past year.

According to a securities filing last Friday morning, May will receive a $1.25 million “base fee” per year. If May becomes permanent CEO or is terminated without cause, he is eligible to receive a bonus of up to 100% of his base salary.

Charter said in the filing that it’s currently negotiating a separation agreement with Vogel and would file the appropriate documents once those discussions are completed.

Vogel’s resignation came after a four-month review of Charter’s operations by consulting giant McKinsey & Co.

Vogel’s four-year contract was set to expire on Dec. 31. He joined Charter in October 2001, after former CEO Jerald Kent abruptly resigned. He spent the next few months reorganizing the management team, restructuring operations into five separate geographic divisions and hiring several new executives, including former Cox Communications Inc. executive vice president of operations Maggie Bellville as COO, and former AT&T Broadband chief financial officer Michael Huseby.

But as Charter continued to bleed subscribers — it lost 126,000 basic customers in the first nine months of 2004 — it also began to bleed management. Bellville resigned in September and Huseby left in August to take a similar job with Cablevision.

On a conference call with analysts last Tuesday, Charter board member Lance Conn said that the appointment of May — who had served as Cablevision’s COO from 1996 to 1998 — would provide “stability and leadership.”

May has established a reputation as a corporate fixer. He was named interim CEO of HealthSouth Corp. in March 2003, after that company was embroiled in an accounting scandal, and successfully turned the healthcare provider around. May continues to serve as HealthSouth’s nonexecutive chairman.

“Charter has faced some challenges,” Conn said on the call. “Its performance has not met your expectations or ours.”

In addition to the subscriber losses, Charter has consistently underperformed in key financial metrics such as revenue and cash-flow growth when compared to the rest of the cable industry. In the first nine months of 2004, Charter reported 6% revenue growth and 2% cash flow growth, compared to an average of 12.2% revenue growth and 14.8% cash flow growth for the other top cable operators, Comcast Corp., Time Warner Cable, Cox Communications Inc. and Cablevision Systems Corp.

May said his focus will be on service delivery, customer care and new products.

“Basic blocking and tackling,” he said on the conference call.

Later, in an interview, May expanded on his plans to improve customer service.

“Our call-center performance is not up to my standards,” said May. “That needs a lot of work. I think the evidence of customer satisfaction or dissatisfaction, as represented in churn numbers that are not acceptable and whether the churn is caused by not executing properly or by competitors, it all boils down to the same thing: we are anxious to deploy new technologies.

“You can’t deploy new technologies like voice-over-IP and have execution that is less than flawless. People aren’t going to stand for picking up the telephone and not having a dial tone.”

ALLEN SEES TREND

At least for now, May’s customer care strategy has the full backing of Charter chairman Paul Allen.

“As we start to see improvements there it will be reflected in churn and basic-sub growth and other obvious metrics,” Allen said. “I think you’re seeing with what happened at Time Warner recently, a trend within the industry to focus a lot more on these customer-facing, customer-touching and general operational issues.”

“All of us MSOs live in an environment that’s more competitive all of the time,” Allen continued. “It’s more incumbent on us to deliver excellent service and respond to customers in a very crisp positive way. That helps us deploy all these advanced services where we are going to see the lion’s share of our revenue growth in the future. It’s pretty much become the order of the day in this business.”

While Charter has had operational issues, most analysts see a crushing debt load as the biggest problem. With about $18.5 billion in debt, many in the financial community have called for Allen to inject capital into the company to ease the leverage burden. Those requests have mainly fallen on deaf ears.

In Vogel’s defense, the former CEO successfully restructured several billion dollars of Charter’s bond debt, extending maturities to give the MSO more breathing room. But most observers agreed that he had few tools to work with.

“We continue to ask the question: 'Where is Paul Allen?’ ” Soleil Securities cable analyst Laura Martin wrote in a research report. “Charter is overleveraged, and cannot deleverage without a meaningful equity infusion. Allowing Vogel to resign nearly one year before his contract ends is another signpost to us that Allen is not supportive of his own equity investment in Charter. We can’t see why the public equity markets should be more supportive of this company than Charter’s largest shareholder.”

Others speculated that Vogel’s resignation could be a signal that Charter’s fourth-quarter results will be worse than expected.

In a research report, A.G. Edwards Inc. analyst Michael Kupinski predicted fourth-quarter subscriber losses could reach 55,000 at Charter.

Investors apparently felt the same way and drove Charter stock down 15% (31 cents per share) between Jan. 14 and Jan. 20, when the stock closed at $1.74 per share.

While Charter was figuring out how to attract a new CEO, Cablevision’s current CEO was making moves to squeeze out from under the considerable shadow of his father.

Although Cablevision had said in a December securities filing that it had suspended its plans to spin off Rainbow DBS — as part of a larger spinoff of Rainbow Media Enterprises — and was considering strategic options for Voom, Charles Dolan has been reportedly trying to convince the Cablevision board to keep the service alive.

BANK WEIGHED IN

According to one source familiar with the matter, Cablevision’s board of directors restated its stance to sell Voom after an investment banker said it had no confidence in the viability of Voom.

Last Thursday, Cablevision’s board agreed to sell some of Voom’s assets to EchoStar Communications Corp. for $200 million.

“The board had given him [Charles Dolan] a yellow light to put some money up and move ahead on the spinoff,” said one source familiar with the matter. “That light changed to red, probably because an investment-banking firm came in and said, 'We’ve updated the dynamics of what’s going on in the world and it makes no sense.’ ”

The source said that he did not know the identity of the investment banking firm, but added that Charles Dolan has been making the rounds at several investment bankers, looking for possible funding for Voom. He found no takers.

Charles Dolan launched Rainbow DBS about a year ago, but the service has run into myriad troubles since. Voom — which offers more than 35 channels of HDTV programming, much of it exclusive content — has blown through more than $500 million in funding since its inception and could need as much as $1.5 billion to $2 billion more over the next several years to build and launch new satellites.

DOLAN BID HINTED

Charles Dolan and his son, Cablevision chief information officer Thomas— who was slated to become CEO of RME after the spinoff — also sent out a memo to Voom employees Jan. 19, suggesting the Dolan family could be a bidder for Voom.

“Potential bidders for RDBS include members of the Dolan family,” the memo stated. “We love working with a skilled group as dedicated as the RDBS staff, and we love the Voom project.”

The memo was posted on a Web site — satelliteguys.us — that boasts the largest Voom consumer forum on the Internet. Last Thursday morning, the Web site said it was asked by Voom officials to remove the memo from its forum, and it complied.

While Greenfield said that he was not able to confirm the memo’s authenticity with Cablevision management, he was able to confirm with two different Rainbow Media employees that such a memo was set out Wednesday afternoon by Charles and Tom Dolan.

September