Paul Allen Says "Enough!"
By Ron Grover
How much money is a billionaire willing to let go of? For years, it seemed that Paul Allen was impervious to losses, especially with regard to his cable-TV holdings. He saw these businesses as the linchpin of his "wired world," one in which couch potatoes could order movies, shop, and browse the Net with the flick of a remote control.
But it finally looks like Allen, who has an estimated worth of $25 billion, has had enough. On Jan. 18, Allen, who controls Charter Communications (CHTR ) with a 35.8% stake, has pushed out CEO Carl Vogel. In a decision that was "reached mutually," per the company's press release, Vogel will leave nearly a year ahead of schedule. Charter sources say Vogel was pressured since late in 2004 to step down.
Since this summer alone, Microsoft (MSFT ) co-founder Allen has seen his stake in Charter, which is the country's fourth-largest cable company, drop to $762 million from $1.3 billion as its stock price plummeted on the backs of fleeing subscribers. In all, Allen has lost north of $6 billion on his cable-TV investment since buying it in 1998, when cable stocks were hot.
"SAW THE HANDWRITING."
Vogel, a well-regarded, long-time cable and satellite veteran, was brought in to run Charter in late 2001. While he made strides in overhauling debt, as of the third quarter it had lost 420,000 customers from a year ago, many of them to satellite. Charter lost $3.3 billion in the same quarter. "The company's performance hasn't met your expectations or ours," said Lance Conn, a Charter board member and a member of its strategic planning committee, in a conference call with investors on Jan. 18.
Allen apparently decided to overhaul Charter's management late last year, when the board brought in management consultants from McKinsey & Co. to review Vogel and the company's performance, according to sources close to Charter. McKinsey reported to a special board committee, which included Conn, who advises Allen's Vulcan Ventures investment unit. By late last year, these sources say, the board was at odds with Vogel, who one source says "saw the handwriting on the wall."
The decision to leave, the company said in a statement, was "reached mutually" by Charter and Vogel, who also resigned his seat on the board. Vogel was not available to comment for this story. Allen said in a statement that the board will "work to implement a comprehensive operations improvement program that will better postion the company for growth."
Charter will be turned over -- at least initially -- to Robert P. May, a board member and one-time chief operating officer at cable operator Cablevision Systems (CVC ). May, who is chairman of HealthSouth (HLSH ) says the board will begin a search for a full-time replacement and will move aggressively to fill open positions such as CFO and COO.
Saying that it's "simple blocking and tackling," May pledged that Charter will immediately turn to improving customer service as a way to stem the tide of defections and will more aggressively push new services, including video-on-demand, Internet telephony, and digital video recorders. "There's significant value embedded in Charter that can -- and will -- be used for future growth and for the benefit of our customers and shareholders," said May.
The question is whether Charter is big enough to survive in the fast-consolidating cable and satellite business, where it's towered over by players like Comcast (CMCSA ), DirecTV (DTV ), and Echostar's (DISH ) Dish satellite service, all of which have many more subscribers than Charter.
Not everyone is happy to see Vogel go. "We are disappointed with the departure of Mr. Vogel, who we believe made the best of a difficult situation in leading Charter's financial and operational improvement over the last three years," wrote Billings, Ramsey & Co. financial analyst Alan Bezoza on Jan. 18. "Despite the company's vow to redouble efforts to improve operations, we believe this is even more difficult, given major vacancies in Charter's senior ranks and the potential departure of other senior managers loyal to Vogel."
Getting Charter up and running is crucial to Allen, who has been looking for partners to help take on some of the financial burden, say company insiders. Last year, he talked with leveraged buyout specialists like Blackstone Group, Texas Pacific Group, and Providence Equity Partners, who were turned off by Charter' wobbly performance, according to sources close to the company. Dallas investor Mark Cuban, who last year started a high-definition TV service, also owns a 6% stake. Allen himself was contemplating putting more money into Charter, say sources.
One possible scenario had him bidding for parts of bankrupt Adelphia's (ADELQ ) business, especially in Los Angeles, where Charter has operations nearby. Those systems are likely to go to Time Warner (TWX ), which is bidding along with Comcast for all of Adelphia. That's likely to be put off while May & Co. get Charter's house in order. Even a billionaire has to know when it's time to put away the checkbook.
Grover is BusinessWeek's Los Angeles bureau chief