Charter Communications Plans $3.45-Billion IPO


In what could be one of the largest initial public offerings ever, Charter Communications Inc., the cable television company controlled by computer billionaire Paul Allen, said Wednesday that it plans to raise $3.45 billion through the sale of stock.

The IPO could be a boon for Los Angeles, where Charter plans to increase its cable systems holdings to become one of the area's largest operators. Charter is earmarking at least some of the proceeds from the offering for upgrading cable systems for new high-tech services such as high-speed Internet access, phone calling and interactive television.

The St. Louis-based company, which would be the nation's fourth-largest cable operator and No. 2 in Los Angeles after pending acquisitions and customer swaps, did not specify the timing of the IPO; the number of shares it will issue; or how much stock Allen, who controls 96% of the equity, will sell in the offering.

The IPO, which analysts expect sometime this fall, could be the second-largest ever, after Conoco's $4.4-billion offering last October. It could rival Goldman Sachs' $3.7-billion offering in May, Lucent Technologies' $3-billion offering in 1996 and Infinity Broadcasting's $2.9-billion issue in December.

Charter is hoping to cash in on the high values of cable stocks, but some analysts question the public's appetite for this offering.

"My initial concern is that Charter has bought cable subscribers at the most expensive prices over the last year and has spent so much for their cash flow," said Tom Eagan, a cable analyst at PaineWebber.

Charter, which filed a registration statement with the Securities and Exchange Commission last Thursday, would not comment because of agency rules that forbid company executives' discussing a stock before a public offering.

A successful offering could benefit cable customers in Los Angeles, which is expected to become a showcase market for Charter.

Sources say AT&T; has agreed to a swap in which Charter would get the Los Angeles and St. Louis cable systems owned by MediaOne Group, which the phone giant agreed to purchase in May.

That would more than double Charter's subscribers in the area, giving the company more than 1 million of the 2.8 million cable subscribers in Los Angeles and Orange counties.

Adelphia Communications would have 1.4 million subscribers after a pending acquisition of Century Communications, a swap with Comcast and another swap under negotiation in which it would pick up 410,000 customers from Time Warner.

In the IPO registration statement, Charter said it would use proceeds from the offering to accelerate the upgrade of its cable systems.

As of March, only 35% of its systems had been upgraded to provide advanced services. The company proposes spending $2.9 billion over the next three years to bring upgrade 94% of its systems.

Charter did not specify, however, how much money would be earmarked for upgrades and how much would go for paying for pending acquisitions.

Since April 1998, Allen has bought six of the nation's 20 leading cable operators and six smaller companies to fulfill his vision of a "wired world" in which consumers can access data and entertainment anywhere, any time. The buying binge has brought Charter 6.2 million subscribers nationwide.

Although cable systems represent Allen's biggest bet, the Microsoft co-founder has also, through his Bellevue, Wash.-based Vulcan Ventures, invested in a host of other technologies, including new television recording devices such as TiVo, the Wink interactive TV group and the High Speed Access cable Internet service. Vulcan Ventures is also putting money into a growing stable of content providers, including the Oxygen Media women's cable and Internet network, the ZDTV cable channel, the DreamWorks SKG studio and USA Networks.

Cable stocks have soared over the last two years as new investors such as Microsoft, AT&T; and Allen have endorsed the industry's high-speed pipeline as the preferred pathway for delivering voice, data and entertainment programming to the nation's 100 million households.

Yet the IPO's timing could be a risk.

Cable stocks have recently fallen from their peaks because of regulatory uncertainties stemming from the "open access" initiative, the America Online-led grass-roots crusade that seeks to force cable operators to lease space on their networks to outsiders such as Internet service providers. Cable companies have been counting on exclusive sale of high-speed cable Internet access to recoup the billions of dollars they have invested in their networks to deliver these new services.

In addition, Charter has one of the costliest structures among the industry's five leading companies.

Eagan estimated that Charter's average cost per subscriber is between $3,000 and $4,000.

That compares with less than $2,000 for No. 2-ranked Time Warner. Time Warner acquired most of its systems in the early and mid-'90s, when cable subscribers went for between $1,000 and $2,000.

As a result, Eagan said, Charter's debt-to-cash-flow ratio is higher than the industry average.

Industry executives have also questioned Charter's ability to recoup its investments when so many of its 6.2 million subscribers are in rural and other small markets. Most of Charter's subscribers are scattered among suburban and rural markets in the South. These more sparsely populated markets are generally costlier to service than those in big cities, where the populations are more concentrated.

Charter officials have in the past defended their purchases, arguing that rural customers are starving for entertainment choices and that there is bound to be less competition there.

Although Allen has bid aggressively for Charter's cable acquisitions, he has been beaten out in several bidding wars in part because he was offering cash, lacking the publicly traded stock that many cable pioneers have preferred for tax reasons.

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