Charter not buying AT&T cable stake--at least not yet

With business booming--even in a down economy and with increasing competition from satellite and DSL providers--Charter Communications isn’t in the market to buy AT&T’s broadband cable business.

But that scenario could change, admitted President/CEO Jerry Kent during a call this morning discussing the company’s second quarter results.

“We are not currently in negotiations with AT&T,” Kent said. “We worked very hard to not only maintain our operational excellence, but we’ve tapped the financial markets to achieve all of our financial goals by getting our balance sheet where we promised. Rest assured that Charter will not take unnecessary risks or dilution for the sake of striving to be the largest operator.”

A direct Charter buyout of AT&T’s cable holdings had been considered a remote possibility. More realistic is that the MSO--owned by Microsoft co-founder Paul Allen--would partner with other MSOs such as Cox Communications and Adelphia Cable to buy and geographically divide the AT&T systems.

AT&T’s cable operations went into play when Comcast made a bid that the nation’s biggest cable operator rejected. AT&T has been shopping its wares since, in what many observers believe is an attempt to get a better price.

“We’ve talked with others who have an interest in AT&T, but as of today, we’ve not partnered up for a potential transaction,” Kent emphasized. “While we’ll be opportunistic, any strategic transaction will be considered with our balance sheet in mind, as well as the value in any potential dilution to our shareholders.”

Charter was built through acquisition of smaller, regional cable operations and by assembling geographically correct cable operations either through trades or acquisitions with other MSOs. Company officials have lamented publicly the availability of smaller operators that can be swallowed and included in the Charter family as the MSO builds to get more economies of scale.

On the other hand, the company has built its business by spending money. Now, it is well on its way to becoming debt-free and must tread carefully into the acquisitions space.

Charter reported second-quarter pro-forma revenue growth of 16.1% and 14.1% operating cash-flow growth, exceeding estimates of 13-15% and 11.5-13.5% respectively. Business for digital cable, high-speed data and basic cable subscribers also increased during the quarter, meeting and exceeding expectations, Kent said. The company is expanding its video-on-demand offering to 1.7 million homes and has moved into the retail space through an arrangement with Circuit City to “have premier display space in 63 of their stores in areas that we serve.”

“Charter has always positioned ourselves to our customers as a virtual department store of home entertainment, with something on the shelf for everybody,” Kent said.

That shelf is fully stocked, and the company is starting to make money, he said.

“Our plans, as we stand today, are fully funded until 2003, at which time we expect to generate free cash flow,” Kent said.

With that backdrop, Kent said Charter will not be “distracted” by the ongoing AT&T saga--for now.

“A potential AT&T transaction is in the third inning of a long game that may even have some rain delays and go extra innings,” he said. “With so much of the game yet to be played, the shareholders of this company will rest assured that we won’t allow ourselves to be distracted operationally, and we’re focused on continuing to generate the best operating results in the industry.”