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Paul Allen's Charter in IPO
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July 28, 1999: 1:30 p.m. ET
Cable company plans stock offering to fund growing broadband Net services
By Staff Writer Randall J. Schultz
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NEW YORK (CNNfn) - Charter Communications Inc., a cable firm owned by Microsoft co-founder Paul Allen, will launch an initial public offering worth $3.45 billion to raise money to develop the next level of interactive television.
Charter, which offers cable television and broadband Internet services, has about 6.2 million U.S. subscribers, mainly in the Northeast, South and West. Allen bought the company last year for $4.5 billion.
As the United States' fourth-largest cable company, Charter is the largest such firm not yet public and it has picked an opportune time to move to the market, according to Michael Harris, a cable industry analyst at Kinetic Strategies.
"There's no better time to go public than now," said Harris, who explained companies that can offer broadband services, as cable can, are particularly in demand.
As a pure play cable company, it is also particularly attractive to investors. Other major cable players, such as AT&T (T) and Time Warner (TWX) (the parent company of CNNfn.com) have their cable divisions buried within a larger corporate structure.
Charter's initial public offering will suit two purposes for Charter, said Harris. First, it will allow it to raise additional funds for further acquisitions.
Second, it also will give it more money to upgrade its infrastructure. While the cable going into users' homes will remain intact, the increased services mean the broadband "pipe" leading to homes will need to be widened.
Paul Allen
The company said it hasn't yet set the number of shares to be offered, but the initial public offering should occur sometime during this year's third quarter.
Charter has been on an extensive buying spree in the last year. Its recent acquisitions include Bresnan Communications for $3.1 billion, Falcon Communications for $3.6 billion, and Avalon Television for $845 million.
Allen also has sought to expand the company's Internet offerings. In March, he took a $300 million controlling interest in Go2Net, a community Web site operator.
The company hopes to take advantage of broadband technology, which will offer faster and richer content to Internet users. Increasingly, cable companies are looking to leverage their main asset, namely cables going into individual homes, to multiple uses.
These cables offer a fat pipeline allowing downloads of data and interactive content at much higher speeds than ordinary phone lines.
In addition, many companies are betting that consumers will want one-stop shopping for their phone, Internet and other communications services, and cable firms, like phone companies and other interests, want to get there first.
They zig, Allen zags
While Allen's Charter is right up there with the big boys as far as the number of subscribers, it actually is quietly pursuing a strategy at odds with many of its peers.
While companies like AT&T have focused on getting the largest possible share of the top U.S. markets, such as San Francisco, Allen has pursued a different strategy.
No Charter system has more than 50,000 subscribers and it has instead focused on medium to smaller areas and suburbs of larger cities.
And while other large cable players are looking to crack into the local phone markets in their areas, which would generate a faster return on their investments, Charter instead is looking to experiment and shape the broadband services of the future.
Charter is hoping to use these smaller units as test markets for interactive services, according to Jerry Kaufhold, senior analyst at Cahners In-Stat Group, a technology research firm.
"Allen believes that locally flavored, smaller interactive television [markets] will be attractive," said Kaufhold, adding that Charter has tried to pick up market share in areas which have a somewhat more cohesive, small town atmosphere.
These areas, said Kaufhold, will be too small to be served effectively by the other companies, which will instead seek to spread a range of services geared toward the widest range of users possible.
The strategy has its risks. While other firms may be content to cut deals and swap subscribers to stay out of each other's way in order to gain a larger base, Charter will find itself competing for a niche among their flanks.
However, if Allen's gamble succeeds, those same competitors may find themselves one day knocking at his door to purchase Charter's operations, especially if Allen is able to develop interactive services those subscribers want.
Kaufhold said Allen is a forward-thinking executive who is well positioned to succeed. However, for those who want to buy Charter shares when they're available, they'd better be prepared to wait at least five years.
"It's going to be a long-term investment for anybody who gets in on the IPO."
Cable consolidation
Charter's buying spree is part of a general trend toward consolidation in the cable industry. On Tuesday, Cox Communications said it will buy the cable operations of publisher Gannett Co. for $2.7 billion. In May, Cox picked up TCA Cable for $4 billion.
However, such deals pale in comparison with those of AT&T, which has been the most aggressive agent in pursuing cable interests. Case in point is the company's agreement in May to acquire MediaOne Group for $48 billion. Last year, AT&T acquired Tele-Communications Inc. for $48 billion.
The buyout frenzy means that many of the more desirable cable firms already have been snapped up.
In addition, cable companies face another problem. As they become larger they can attain economies of scale, allowing them to offer more people services at lower costs.
However, merely having millions of subscribers across the country is not enough. Instead, cable firms looking to offer integrated services need to attain "clustering."
Since companies have to upgrade their networks to offer services, it becomes important for them to have a larger number of subscribers in one geographic region, or cluster, so that one upgrade investment can serve a concentrated number of users.
However, in the midst of a cable buying frenzy, companies can find themselves with far-flung interests.
Industry watchers predict that as consolidation slows, a swap meet will ensue, where companies trade a subscriber base in one area for subscribers in another area closer to their other interests.
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Charter Communications
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