Broadband Cable Association of Pennsylvania

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March 19, 2013

As a pioneer in the U.S. cable industry, John Malone's hard-nosed deal making earned him the moniker "Darth Vader." Now, 14 years after selling a big chunk of his empire to AT&T, Mr. Malone is returning to the fray.

Mr. Malone's Liberty Media Corp. is close to an agreement to buy 25% of Charter Communications for about $2.5 billion, say people familiar with the situation. The deal promises to re-establish Mr. Malone as a force in cable TV at a crucial point in the industry's history, as slowing growth combined with rising costs is pitting entertainment companies that supply programming against cable operators that control both TV distribution and access to the Internet. The purchase would be Mr. Malone's first big investment in a cable operator in the continental U.S. since he sold Tele-Communications Inc. to AT&T for $48 billion in 1999. Charter is the eighth biggest pay-TV provider, with 4.2 million video subscribers.

Analysts said the 72-year-old Mr. Malone may be interested in Charter because of the potential for consolidation in the cable industry-which Charter's CEO, Tom Rutledge, would be well-equipped to manage. Mr. Rutledge, who was hired away from Cablevision Systems Corp. in late 2011, is regarded in the industry as a savvy veteran with deal-making chops. He engineered a deal, announced in February, for Charter to pay $1.625 billion for Cablevision's western cable systems, operated through a subsidiary called Bresnan Broadband Holdings LLC. Liberty is expected to buy the stock from a group of private-equity firms that control Charter. The group includes Apollo Global Management and Oaktree Capital Management. Mr. Malone couldn't be reached for comment and Liberty Media declined to comment. Charter declined to comment. Charter shares jumped 9%, to $98.04, in Nasdaq trading Monday, after The Wall Street Journal reported Liberty's expected investment.

Through the 1980s and 1990s, Mr. Malone built TCI into the biggest U.S. cable operator, in the process becoming one of the most powerful executives in the television industry. After selling TCI to AT&T, he focused his time on Liberty, which held a range of investments in various media companies, while expanding in the cable industry overseas. In recent years Liberty has spun off several investments into separate public companies in which Mr. Malone retains a big interest. These include Discovery Communications, premium cable service Starz and Liberty Interactive, which owns home shopping channel QVC. Analysts say Liberty has plenty of cash to put to work and has been scanning the field for big opportunities. Mr. Malone already has struck deals further afield. Liberty Global Inc., a separate company Mr. Malone effectively controls that has extensive international cable-TV interests, recently agreed to buy U.K. cable operator Virgin Media for $16 billion. And last year, Liberty Global teamed up with Charter Chairman and Searchlight Capital Partners co-founder Eric Zinterhofer to acquire a small cable system called OneLinkCommunications in Puerto Rico for $585 million.

U.S. cable operators are seeing strong growth in broadband Internet usage-fueled by increasing usage of bandwidth-guzzling services like online video. Their TV business is another matter, though. Some 90% of households with television sets already subscribe to some form of pay TV. Moreover, consumers are grumbling about pay-TV fees, and with new online video options like Netflix Inc. and Amazon.com Inc., concerns are growing that users might disconnect their pay-TV connections. The private-equity firms that now control Charter got stock when the company emerged from bankruptcy in late 2009. Once controlled by Paul Allen, Microsoft Corp.'s co-founder, Charter had filed for bankruptcy in March 2009, weighed down by $22 billion in debt. Under Mr. Allen, Charter had gone on a spree of acquisitions in the late 1990s, becoming one of the nation's largest cable providers. Charter's assets are spread thinly across small and mid-size markets. Charter shed about 40% of its $22 billion in debt through the bankruptcy process. Mr. Allen still retains a small stake.

Since joining the company, Mr. Rutledge has repeatedly emphasized the upside to Charter's business. "Charter was a mess," he said at a Deutsche Bank investor conference this month. "It went through a terrible process...and I always had looked at the business of Charter as a greenfield opportunity or a diamond in the rough." One industry executive said that Mr. Malone holds Mr. Rutledge in high regard for his operating ability and has praised his success at Cablevision in the past. "Rutledge has an excellent reputation. It's classic Malone-back the guy who knows what he's doing," said John Tinker, an analyst at Maxim Group.

In response to a question about mergers and acquisitions, Mr. Rutledge said at the investor conference that "there are some advantages to scale" but also said bigger size can make it more complex to run a service-oriented company. He said Bresnan was "a good value for us and we'll look to all assets like that" but he cautioned that "we don't have to do anything with anyone to be successful." One executive familiar with Mr. Rutledge's thinking said he sees a lot of growth opportunities in smaller markets where there is less competition and where there is potential to market cable broadband to consumers who haven't upgraded from DSL Internet service. Garrett Baker, president of Waller Capital Partners LLC, a boutique investment bank that advises cable operators and media companies, said Mr. Malone's expected investment is a vote of confidence in the rural cable business. "People may have been spending less on television but were not spending less on Internet," he said. Wall Street Journal


Outdoor Channel Holdings Inc., the hunting-and-fishing cable-TV network that agreed to be bought by Kroenke Sports & Entertainment LLC for about $227 million, is being sued by an investor who claims the offer is too low. Outdoor earlier accepted an $8-a-share offer in cash or stock from InterMedia Outdoors Holdings LLC, then rejected the offer in favor of Kroenke's all-cash $8.75-a-share bid, costing the company a $6.5 million breakup fee, the Outdoor stockholder, Roberta Feinstein, said in a Delaware Chancery Court complaint filed Monday in Wilmington.

The price increase "could have been significantly higher had the board not hastily agreed to the inadequate offer by InterMedia," and Temecula, Calif.-based Outdoor should be auctioned, Feinstein said in court papers. Closely held Kroenke, based in Denver, owns and operates the Denver Nuggets of the National Basketball Association and the Colorado Avalanche of the National Hockey League. Outdoor runs shows on shooting, country music, off-road motor sports, gold prospecting, horse racing, rodeos, softball and soccer, as well as hunting and fishing. Joe LoBello, a spokesman for Outdoor, didn't immediately return voice and e-mail messages seeking comment on the lawsuit. Denver Post

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