Charter Communications, Inc. Business Information, Profile, and History

Company Perspectives:

Imagine a time when television, computers, the Internet and telecommunications converge, and the world of entertainment and information come into the home and the workplace through a single cable wire. The vision is here. We offer a full range of traditional cable television services and are launching digital cable television services, interactive video programming, and high-speed Internet access, and are exploring opportunities in telephony. All of these services will be delivered through the far-reaching digital cable network of Charter Communications.

History of Charter Communications, Inc.

At the end of 1999 Charter Communications, Inc. operated cable systems with 6.2 million subscribers, making it the fourth largest multi-system operator (MSO) in the United States behind AT & T Corp., Time Warner Inc., and Comcast Corp. The company was founded in 1993 and grew through a series of acquisitions. In 1998 it was purchased for $4.5 billion by Microsoft cofounder Paul Allen, who merged it with Marcus Cable which he had previously acquired. With Allen providing much of the funding, Charter went on an aggressive acquisition drive in 1998 and 1999. The company made eleven major acquisitions in 1999, culminating in an initial public offering (IPO) in November that raised approximately $3.5 billion.

Charter Grows through Acquisitions: 1993-98

Charter Communications, Inc. was formed in January 1993 by three former executives of St. Louis-based Cencom Cable Associates, Inc. Howard Wood was the former president and chief executive officer (CEO) of Cencom; Barry Babcock was the former chief operating officer (COO) of Cencom; and Jerry Kent was Cencom's former chief financial officer (CFO). Cencom had been acquired in 1991 by Crown Media Inc., a Dallas-based subsidiary of Hallmark Cards Inc., for an estimated $1 billion. Crown subsequently made an initial investment of several hundred thousand dollars in Charter, and in turn received a 51 percent non-voting stake in the company. The decision to form Charter was precipitated by Crown's plans to move Cencom's headquarters from St. Louis to Dallas. Babcock became Charter's chairman, Kent president, and Wood was management committee chairman.

At first Charter was based in Cencom's offices in west St. Louis County. The company expected to acquire cable properties and began looking around the country. It was also considering such cable-related businesses as telecommunications and video data systems. When Charter was first established, the regulatory environment for cable television was changing. Congress had just passed a new cable bill over President George Bush's veto, but the Federal Communications Commission (FCC) had not yet established all of the regulations to enforce the new legislation.

In February 1994 Charter announced its first acquisition. It would spend nearly $200 million to acquire ten cable systems in Louisiana, Georgia, and Alabama. The systems were acquired from the McDonald Group of Birmingham, Alabama, and served about 100,000 subscribers in the Southeast. Charter's strategy at this time was to acquire smaller systems throughout the Southeast and eventually go public.

The price for cable systems jumped dramatically after the regional Bell operating companies (RBOCs) such as Southwestern Bell began buying cable systems in 1993. Southwestern Bell paid about $2,888 per subscriber in a $650 million acquisition in February 1993. The cost of Charter's first acquisition was estimated at about $1,500 to $2,000 per subscriber.

In June 1994 Hallmark Cards sold its Crown Media cable subsidiary to Charter and Marcus Cable for $900 million. Charter purchased the Crown cable systems serving about 270,000 customers in Connecticut, Kentucky, Missouri, North Carolina, and South Carolina. Charter also assumed management of Crown-affiliated cable systems serving another 360,000 subscribers. Marcus acquired the remaining Crown Media cable properties. It was estimated that Charter and Marcus paid about $2,000 per subscriber.

In January 1995 Charter, in partnership with the money management firm Kelso & Co., announced it would acquire Nashville-based Gaylord Entertainment's cable systems serving 180,000 subscribers in California, North Carolina, and South Carolina, for about $370 million. Gaylord selected the Charter-Kelso partnership, CCT Holdings, over Century Communications, with whom it had also been negotiating. The agreement was finalized in April, increasing Charter's cable systems to 850,000 subscribers, and completed in October, by which time Charter had over 900,000 subscribers. The Gaylord family was one of the initial investors in Charter with a 20 percent stake in the company.

In mid-1995 Charter picked up another 29,000 subscribers in northern and central Alabama from CableSouth Inc. for about $50 million. It also acquired Peachtree Cable Systems with 13,000 subscribers in Georgia for $20 million. At the same time the company was bidding for a much larger cable property, Multimedia Inc., which had hired the investment banking firm Goldman Sachs & Co. to auction the company. Multimedia's cable holdings included 125 franchises with 450,000 subscribers, mainly in Kansas, North Carolina, and Oklahoma. Charter's partners in the bidding were Kelso & Co. and Ellis Communications. They were competing against a group led by the National Broadcasting Co. that included cable giant TCI and others, but Multimedia was sold in 1994 to Gannett Company Inc. for $1.7 billion. At the time Charter was the 15th largest MSO in the United States.

In March 1996 Charter acquired WIBV(AM) serving the St. Louis area for between $1 million and $1.5 million. It was the company's first radio station. In April the company purchased the cable systems it had been managing for Cencom for $211.1 million. The systems served 100,000 subscribers in eight states. In August Charter expanded its share of the Southern California cable market by acquiring CVI Cable for an undisclosed amount. CVI served 67,000 customers in Long Beach and Signal Hill, while Charter had more than 250,000 customers in other Southern California communities.

Charter's fourteenth acquisition--the 37,000-subscriber Price Cable of Hickory, North Carolina--put it over the one million subscriber mark in February 1997. Between 1993 and 1997 Charter raised more than $2 billion in equity and debt to fund its acquisitions. The company had three or four major financial investors and adopted a different clustering strategy with each partner. The acquisitions involving Kelso & Co. followed an urban clustering strategy, resulting in 230,000 subscribers in St. Louis, 250,000 subscribers in the Los Angeles metropolitan area, and 100,000 subscribers in the Northeast, notably Hartford and New York. Another financial partner, Charterhouse Group International, was used to acquire more than 400,000 subscribers in the southeastern United States.

During 1997 Charter attempted to acquire US West Media Group's 230,000-subscriber cable systems in Minneapolis-St. Paul for $600 million. However, the deal fell through, and in April 1998 the renamed MediaOne Group, a subsidiary of US West, was required to pay Charter between $30 and $50 million to keep the cable systems.

During the second half of 1997 Charter added 70,000 subscribers in Long Beach, California, with the purchase of KC Cable Associates LP for $150 million. In September 1997 Charter announced it would acquire cable systems with 117,000 subscribers in California and Utah from Sonic Communications. The deal closed in May 1998, and Charter moved into the top ten among MSOs. Other negotiations failed to add to Charter's systems. Charter's bid for a 300,000-subscriber Las Vegas systems was topped by Cox Communications' $1.3 billion offer, and Dallas-based Marcus Cable went to the entrepreneur Paul Allen for $2.8 billion.

Paul Allen Moves into Cable in a Big Way: 1998-99

Following his purchase of Marcus Cable, Allen bought Charter for $4.5 billion, or about $3,800 per subscriber. Allen's interest in cable properties may have been spurred by Bill Gates's $1 billion investment in 1997 in Comcast. Both Gates and Allen had developed a vision of a 'wired world,' when everyone would have a PC at home and at work and be connected by a global network. Cable was now perceived as the best way of implementing that vision by delivering high-speed services over the Internet into American homes.

Kent was named president and CEO of the new company, which combined Charter's 139 cable systems in 17 states with those of Marcus in six states. Babcock became vice-chairman, and Wood was named senior adviser. The company's headquarters remained in St. Louis. The combination of Marcus and Charter created the seventh-largest MSO in the United States, with 2.4 million customers. By the end of 1998 Jeffrey Marcus had left Charter to join Chancellor Media, and Babcock was named chairman. Two top Marcus Cable officials were also dismissed following service problems in Fort Worth and other North Texas cities that were blamed on poor management.

In September 1998 Charter reached an agreement with EarthLink, one of the largest independent Internet service providers (ISPs) in the United States, for EarthLink to offer Internet access over cable modems to Charter's cable customers. The Charter Pipeline service, as it was called, began in 1997 in Southern California. The new agreement would eventually cover Charter's 19-state operating area and give EarthLink a potential market of 1.8 million customers. For 1998, Charter reported a net loss of $535.4 million on revenues of $2.7 billion.

In January 1999 Charter added 68,000 subscribers in Southern California with the purchase of four cable systems from American Cable Entertainment of Stamford, Connecticut. After the acquisition Charter would have more than 500,000 subscribers in the region.

Also in January Charter joined with cable giant TCI Inc. in a $2.4 billion deal to purchase 60 percent of the subscribers of InterMedia Partners, ranked as the tenth largest MSO. Charter would acquire 400,000 InterMedia subscribers, primarily in the Southeast, for an estimated $1.3 billion. As part of the deal Charter would turn over about 140,000 of its subscribers to TCI. At the time TCI was in the process of being acquired by AT & T.

During February 1999 Charter made several acquisitions and added one million subscribers. By the end of the month it had about 3.33 million subscribers after completing the announced transactions and merging with Marcus Cable. The acquisitions would make Charter the sixth-largest cable operator in the United States. Among the acquisitions were cable systems serving 460,000 subscribers from Rifkin Acquisition Partners and InterLink Communications purchased for an estimated $1.5 billion. Charter also picked up 173,000 subscribers, mostly in central Massachusetts, from New Jersey-based Greater Media Inc., which also sold its cable properties in Philadelphia serving 79,000 subscribers to Comcast. Charter increased its presence in the Southeast by acquiring Renaissance Media Group, a New York partnership serving 130,000 customers near New Orleans, western Mississippi, and Jackson, Tennessee. The price was estimated at $450 million, or about $3,500 per subscriber.

SEC filings that were required before selling $3 billion worth of bonds to pay off higher-interest debt revealed that Allen had personally invested about $4.6 billion to finance $10.6 billion worth of cable acquisitions, making cable Allen's single biggest investment. Allen's personal fortune at the time was estimated at about $22 billion.

In March 1999 Charter confirmed rumors that it was planning an initial public offering (IPO) for the second half of 1999. With 3.4 million subscribers, it was the seventh largest MSO in the United States. The IPO was expected to raise $2-$3 billion. That same month Charter bought a collection of cable systems in the Southeast and Northeast with the $550 million acquisition of New Jersey-based Helicon Cable Communications. The systems served about 171,000 customers in eight states. Charter paid about $3,200 per subscriber. Allen had invested $11.2 billion for cable properties over the past year, with more to follow.

In April the Dallas-Fort Worth cable franchises that had been under Marcus Cable began doing business under their new name, Charter Communications. In May Charter acquired Avalon Cable TV for $845 million, adding 260,000 subscribers at about $3,250 per subscriber. The acquisition gave Charter 3.9 million customers, taking into account all pending acquisitions. Avalon had acquired most of its subscribers in 1998 from Cable Michigan Inc. when it bought the 220,000-subscriber cable company for $473 million. Charter also acquired a Vista Communications cable system in Smyrna, Georgia, for $125 million.

In May Charter announced it would acquire Falcon Cable TV of Los Angeles for $3.6 billion. The deal would give Charter a total of about five million subscribers and move it up in the rankings from fifth to fourth largest MSO. Falcon was the eighth largest cable operator in the United States with about one million subscribers in 27 states in primarily non-urban areas. It was Charter's ninth acquisition of 1999, and certainly not its last.

Charter's tenth acquisition of 1999 involved Fanch Communications Inc. of Denver. Fanch had 547,000 subscribers, including 308,000 in West Virginia and Pennsylvania, 70,000 in Michigan, and 70,000 in Indiana, Kentucky, Louisiana, and Wisconsin. It was reported that Charter paid $2 billion, or $4,000 per subscriber. The acquisition gave Charter a total of 5.5 million subscribers. Following the acquisition, Charter was the fourth-largest MSO behind AT & T with 16 million subscribers, Time Warner with 12 million, and Comcast with 6.2 million. Adelphia and Cox each had about five million subscribers. Figures include acquisitions pending at the time.

In July Charter was the successful bidder to acquire New York-based Bresnan Communications after the firm began receiving unsolicited offers prior to going public. The company was founded by cable industry pioneer William J. Bresnan in 1984. It had rebuilt and upgraded most of its systems and offered high-speed Internet service in about half of its markets. Charter's offer of $3.1 billion gave it an additional 690,000 subscribers at a cost of about $4,500 per subscriber, including 298,000 in Michigan, 221,000 in Minnesota, 110,000 in Wisconsin, and 61,000 in Nebraska. The acquisition gave Charter a total of 6.2 million subscribers.

Charter Continues as a Public Company: Late 1999 and Beyond

It was the $3.2 billion Bresnan acquisition that fueled speculation that Charter was about to go public. Analysts believed that while Paul Allen had 'deep pockets,' Charter would need the equity financing that a public stock offering would provide to continue making acquisitions. At the end of July Charter filed documents with the SEC for one of the largest initial public offerings (IPO) ever. The company proposed selling $3.5 billion worth of stock. Up to this time Charter's acquisitions had been financed primarily by Allen borrowing against his $28 billion worth of Microsoft shares. It was estimated that he had committed $11 billion of his own money to finance acquisitions totaling $21.8 billion between March 1998 and mid-1999.

When Charter went public in November 1999, the company raised $3.2 billion by selling 170 million shares, or 60 percent of its equity, at $19 a share. Underwriters had an additional 25 million-share allotment to sell later, which could push Charter's gross to $3.7 billion. In addition to the IPO, Allen infused $750 million of his own money into the company. Following the IPO, Allen retained control of the company through his ownership of Class B securities, which had about 10 times the voting power of the Class A shares available to the public.

Charter's strategy following the IPO was to launch digital cable service in its systems and offer high-speed Internet access through cable modems. At the time of the IPO Charter was heavily leveraged, with its debt level at more than seven times its annual cash flow. The company had $9.4 billion worth of acquisitions pending, including major deals for Falcon Cable TV, Fanch Communications, and Avalon Cable. Once those deals were completed in November 1999, Charter would have to invest heavily in upgrading their systems.

To help develop and execute Allen's vision of a 'wired world,' he created a consortium called Broadband Partners, consisting of companies in which he had financial interests. In addition to Charter, the consortium included RCN, a company that was dedicated to overbuilding existing cable systems with its own high-speed cable network. Just prior to the Charter IPO, Allen had invested $1.65 billion in RCN. Also part of the consortium were High-Speed Access Corp. and Go2Net. Broadband Partners would work together to develop and deploy content and services to Charter's cable subscribers.

Charter also began swapping customers with other systems to improve the geographic clustering of its systems. In December 1999 it signed a letter of intent with AT & T to swap 1.3 million cable subscribers in St. Louis as well as in Alabama, Georgia, and Missouri. The exchange would make Charter the dominant MSO in its home market of St. Louis, with 500,000 subscribers there that would be combined with subscribers in nearby Illinois for an 800,000-subscriber cluster. Charter said that its St. Louis customers would be the first to be offered advanced services such as cable telephone service, interactive video, and high-speed Internet access. The deal called for Charter to receive a total of 704,000 subscribers from AT & T in exchange for 632,000 Charter customers in California, Connecticut, Kentucky, Massachusetts, Tennessee, and Fort Worth, Texas. Analysts expected more exchanges of customers to take place in the cable industry, since most of the desirable MSOs that were willing to sell had been acquired by the industry's major players.

Principal Competitors: AT & T Corp.; Time Warner Inc.; Comcast Corp.; Adelphia Communications Corp.; Cox Communications Inc.

Chronology

• Key Dates:

• 1993: Charter Communications, Inc. is formed by three former executives of Cencom Cable Associates, Inc., in St. Louis, Missouri.
• 1994: Begins acquiring cable television systems.
• 1997: Reaches one million subscribers.
• 1998: Charter is acquired by Microsoft Corp. cofounder, Paul Allen, for $4.5 billion.
• 1999: Charter goes public in November after making more than ten major acquisitions in one year.