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Charter Surges on Allen Buyout Hopes

8/04/2002 8:00 PM Eastern

Less than a week after the shareholder meeting at which Charter Communications Inc. CEO Carl Vogel restated a commitment to continued new-services rollouts, Charter stock surged on speculation that its billionaire chairman was moving to take the company private.

Last Monday The New York Times, citing unnamed sources, claimed that Allen — also the co-founder of Microsoft Corp. — was contemplating the purchase of more Charter stock and debt, possibly in a move to take the MSO private.

Charter officials declined comment.

Rumors of Charter's impending privatization have been around for months, particularly as the company's stock price has plunged to all-time lows.

The news encouraged investors, who drove Charter stock up by nearly 37 percent during trading July 29 to $3.61 per share, up 95 cents each. The shares closed at $3.60 on July 31.

POCKET CHANGE

Allen could buy Charter's remaining outstanding shares cheaply. Even with their rising price — they closed at $3.82 on July 30 — Allen could pay twice as much for the remaining 133 million shares he doesn't own for a little more than $1 billion.

Allen and several other company executives have been buying Charter stock on the open market recently, with Allen spending about $20 million to buy more than 5 million shares. Coupled with his holdings in Charter's super-voting shares, Allen controls about 93 percent of the company's vote.

Some of Charter's $17 billion of debt is currently trading at about 35 cents on the dollar.

Allen's personal worth is said to be $28.2 billion, according to Forbes
magazine's list of the 400 richest people in America.

According to some reports, Allen also could use some of his fortune to invest as much as $500 million in Charter stock and bonds. Such a significant investment would send a positive signal to other investors about Allen's belief in the strength of the company.

Earlier last month, financial legend Warren Buffet invested about $500 million in Level 3 Communications Inc. bonds, helping to send the telecommunications service carrier's stock up 29 percent in a little more than two weeks.

UBS Warburg LLC cable analyst Aryeh Bourkoff downgraded Charter bonds a day after the Times
story broke, adding that he believes it's unlikely that Allen will take the company private, because it could trigger change-of-control covenants in some of Charter's senior notes.

According to Bourkoff's report, if Allen were to own more than 70 percent of Charter's Class A stock — he currently owns 55 percent — and if the closing price of that stock was less than 100 percent of the of the conversion price of the MSO's convertible senior notes, Charter would be required to purchase those notes at par.

Given that the conversion prices on those notes range from $21.56 to $26.25 — nearly nine times Charter's current stock price — Charter could be forced to pony up as much as $1.38 billion for the convertible notes.

"We do not believe Paul Allen would put the company in a position in which it would trigger this covenant," Bourkoff wrote. "We do not think a privatization of the company by Paul Allen is likely at this time."

ANY PARTNERS?

However, Bourkoff noted that if Allen were to take on a partner to purchase the majority of Class A shares, the change-of-control covenant could be avoided. But just who that partner would be remains to be seen.

A move by Allen to take Charter private might be a long shot, Banc of America Securities LLC cable analyst Doug Shapiro said in a research note. But reports that he might do so have shed new light on the cable bond sector. And that is not a bad thing.

In a research report, Shapiro wrote that cable bonds, long ignored by equity investors — mainly because of their complexity — could present an arbitrage opportunity for some operators with liquidity, like Comcast Corp. and Cox Communications Inc. Although Charter doesn't really meet the liquidity criterion, Allen does, Shapiro added. He could thus buy Charter debt across the capital structure and then swap it back to the MSO in exchange for equity.

Shapiro wrote that the current perception is that cable debt pricing is tied to poor supply-and-demand dynamics and investors' reluctance to invest in telecom, rather than fundamental changes in cable credit quality. More importantly, he added, there is an inherent inconsistency between the trading level of some cable bonds and stock prices.

"The debt markets are implicitly predicting that some of this debt is unlikely to be made whole while the stocks retain material market capitalization," Shapiro wrote. "They can't both be right.

"Either Charter, Cablevision [Systems Corp.] and Mediacom [Communications Corp.] are likely to file Chapter 11 [bankruptcy] or the debt is significantly mispriced. We believe it's the latter."

September