Paul Allen's Charter Stiffs Common Shareholders

Charter Communications restructures debt load with a planned Chapter 11 bankruptcy filing. The deal allows Charter to live for another day, keeps Microsoft co-founder Paul Allen still in charge and leaves common stockholders with worthless stock.

Cable company Charter Communications -- bankrolled by Microsoft co-founder Paul Allen's largest investment since leaving Microsoft in 1983 -- said Feb. 12 it plans to file for bankruptcy in an effort to reduce the nation's fourth-largest cable operator's heavy debt load by as much as $8 billion. In the process, Charter left its common stockholders holding an empty bag.

The Charter announcement details a complicated arrangement in which holders of $8 billion of the company's debt will forgive the debt in return for common shares or warrants to obtain common shares. Allen, 55, holds some of that debt that can be converted to stock and will retain voting control of the company.

For Allen, a billionaire recently ranked by Forbes as the 12th richest man in America with a net worth of $16 billion, the deal allows Charter to live for another day. For common stockholders, though, the bet on Allen was a bust. As the Charter announcement states, "Holders of common stock will not receive any amounts on account of their common stock, which will be cancelled."

The news of the restructuring deal was generally well received on Wall Street, but bloggers blasted Allen and Charter.

"How does Paul Allen remain the main shareholder while all of the shareholders' stock is worthless? THIS SOUNDS LIKE ANOTHER RIP OFF," wrote Frank C. on the the Tech Trader Daily blog. Another blogger added, "We should all get together and pool our money and sue him. And let him feel what its like to lose hard earned money." And so and so forth.

Over at the Google financial blog, one post read, "Because of Charter's negative equity, the common stock shareholders who agreed to accept the risk of losing everything, will lose everything.  Anyone who has asset backed stock, such as Paul Allen, will be taken care of." Another took comfort in that the shareholder wipeout would be tax deductible.

Meanwhile, after announcing the debt restructuring planned under the proposed bankruptcy filing, Charter proceeded to predict a rosy future for the cable company.

"We are pleased with our operational results during the fourth quarter, particularly in this challenging economic environment," said Neil Smit, Charter's president and CEO, in a statement. "We remain committed to delivering value to our customers through our bundle of quality video, high-speed Internet, and telephone service, and through this [debt] agreement, we will be even better positioned to deliver the products and services our customers demand now and in the future. Moreover, the interest and support provided by our stakeholders with their new capital investment underscores their confidence in Charter and our business."

Charter said its operations are "strong" and noted that preliminary fourth quarter results show revenue growth of approximately seven percent. Charter also said as of Feb. 11, the company had $800 million in cash in the bank.

"Charter believes its liquidity, combined with its cash from operating activities, will be sufficient to meet its projected cash needs, including the payment of normal operating costs and expenses, as it proceeds with its financial restructuring," Charter stated.

Allen bought Charter in 1998, assuming some $20 billion in debt, proceeded to invest $7 billion in the company and built Charter into the country's fourth-largest cable company with 5.5 million customers. Allen took the company public in 1999 and by 2000, the stock was selling for $25 a share, which turned out to be a high water mark for stockholders. The stock began a long tumble in 2001 and never recovered. Before the bankruptcy filing announcement, Charter stock was selling for seven cents a share.