Charter flight

10 March 2006 By Rob Cox

It’s hard to pity Paul Allen. The Microsoft co-founder is worth $21bn, owns a 414-foot yacht with its own yellow submarine, sits in Captain Kirk’s chair, and built a temple to guitarist Jimi Hendrix. Yet these expensive toys have cost little in comparison with the money Allen has blown in misconceived business ventures.

Since leaving Microsoft two decades ago, Allen has struggled to dispel the notion that he owes his wealth solely to his prep-school camaraderie with Bill Gates. During the dotcom mania he dropped billions into the internet, technology and telecoms sectors – in firms ranging from Priceline to broadband group RCN – with little to show for it.

Now one of his biggest bets, in the cable business, has been dealt a blow. AT&T’s takeover of BellSouth raises the competitive ante for all cable operators. None are as feeble as Allen’s Charter Communications. Its $20bn of debt is 50 times greater than the market value of its equity. Allen’s 58% equity stake is worth $250m, a far cry from the $7bn-plus he spent buying Charter and Marcus Cable back in 1998.

Charter is the most exposed cable company to the new AT&T. A quarter of its territory overlaps with BellSouth’s, a greater percentage than any other operator, Lehman Brothers estimates. BellSouth lagged in offering cable to its customers – one reason it’s selling out. Soon it will launch AT&T’s video services. This clearly threatens Charter.

Allen’s company is in poor shape for a fight. Last year interest payments of $1.8bn nearly matched its earnings before interest, tax, depreciation and amortisation. To cope, it has refinanced debt and sold off subscribers. This financial weakness may explain why Verizon chose a Charter market in Texas to launch its TV services. Even though Charter halved prices as Verizon entered Keller, Verizon still claims to have nabbed a quarter of the market. Charter says it cut prices in response to competition by other operators, including satellite services and disputes Verizon s market share claims.

Any other company in Charter’s condition would probably seek bankruptcy protection. But that would wipe out the bachelor billionaire’s interest, with possible tax implications for his investment, Vulcan Ventures. At least he still has Captain Kirk’s armchair to sink back into and ponder his vaporised billions.


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