By Ronald Grover Paul Allen didn't make it to this year's Academy Awards, even though the billionaire Microsoft co-founder owns 24.5% of the Dreamworks Hollywood studio. That usually puts him on the A list of those attending Tinseltown's annual trophyfest. But these days Allen, who also owns troubled cable company Charter Communications (CHTR), doesn't need the Oscars for drama. His cable conglomerate is facing some tough decisions that may well force him to restructure -- and perhaps lose control of -- his $7 billion investment.
By Mar. 31, St. Louis-based Charter Communications is required under covenants with several of its largest bankers to file its 10-K with the Securities & Exchange Commission. For some outfits that's no big deal. But for months, Charter's accounting practices have been under investigation by the SEC and a federal grand jury in St. Louis. And while the company acknowledges both investigations and says it's cooperating fully, Charter hardly faces a slam-dunk in convincing its auditors at KMPG to sign off on possibly "unqualified" financials, which the lenders have insisted upon.
Without that clean bill of health, Allen's company needs to come to some agreement with its banks. Otherwise, they could force him to restructure the balance sheet in ways that could mean Allen might lose control -- and suffer one of the biggest black eyes yet in the Internet meltdown.
CHICKENS COME HOME. Charter was the centerpiece of Allen's vision of a "wired world," where TV viewers wielding remote controls would surf the Net from the comfort of their Barcaloungers. And Allen, who was once worth north of $30 billion, didn't mind spending his Microsoft (MSFT) riches to make that dream come true, plunking down some $7 billion in a series of deals that created Charter. But the cable company, which has 6.7 million subscribers in 40 states, piled on mountains of debt without adding enough subscribers to offset the costs. Over the last four years, Charter had lost more than $2.7 billion.
The bill may be coming due. According to UBS Warburg analyst Aryeh Bourkoff, Charter has to make a $171 million payment to its bankers by Apr. 1. But if it can't file its financials with the SEC the day before, it would need to seek a 30-day grace period from its bankers -- a move that would freeze the ability to borrow any more money. And with $508 million in cash on its books as of Sept. 30 -- its last report to the feds -- Charter likely wouldn't be able to pay its bankers and still keep enough cash around to finance itself.
If it looks unlikely that Charter can reach an agreement with the auditors on a clean 10-K, figures Bourkoff, it might skip the $171 million payment and instead try to negotiate a restructuring with the bankers during the 30-day grace period. "The company is walking a very tight line," Bourkoff says.
MULLING TOUGH OPTIONS. Where does all of this leave Allen? On Apr. 14, he's required to pay $718 million under a "put" arrangement in which he, as Charter's majority share holder (55.6%), guaranteed his company's 1999 purchase of cable systems from AT&T -- now owned by Comcast (CMCSA). That would put Allen's exposure in Charter at more than $7.5 billion.
In a restructuring, the bankers might insist that Allen put even more money into his debt-plagued business. That seemed plausible last year, when Allen told the SEC that he was contemplating taking Charter private. But the option is less likely now, say those close to Charter. With the stock having sunk to less than 90 cents, from $16 a year ago, a big Allen buying spree would likely bring out shareholder lawsuits in droves. And bringing in cash-flush partners would reduce Allen's stake, an option he never seemed to warm to.
An Allen spokesman declined to comment on what the exec might do next, although sources close to Charter say insiders have been told to steer clear of any further transactions until the various investigations have been resolved. Sources say Allen has hired the New York-based restructuring firm Miller Buckfire Lewis & Co. to help him figure a way out of the mess.
FADING VISION. Charter's board has also appointed a subcommittee to explore its own restructuring options. Investment banker Lazard Freres is rumored to be involved in the search for a solution, but neither company would provide confirmation.
Charter and its banks clearly have to come to some agreement -- and soon. Charter is trying to sell off what it has said are noncore assets to help pare its debt. But bankers are going to want more than what can be raised at a fire sale. And if Charter doesn't make the Mar. 31 deadline, the banks are likely to be very touchy about it. Just about as touchy as Allen, who can't be happy about seeing his Internet vision of a world wired slip away. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online