The Inevitable Recapitalization of Charter (CHTR)

If you have been following the land of low-priced stocks that are active in trading volume for long, you will find many groups of traders who have been betting on the success or death of Charter Communications, Inc. (NASDAQ: CHTR).  Today came the announcement that it has asked Lazard to initiate discussions with bondholders regarding alternatives to improve its balance sheet.

If you have been a reader of ours this is of no surprise.  In ourweekly "10 Stocks Under $10" letter, we have frequently referred tothis as one of the top recapitalization candidates which would not befavorable for stockholders.  In fact, we have even labeled this one asa takeoff on a biblical verse as "walking through the Valley of theShadow of Debt." 

The company this morning it had 7.3% revenue growth and its netcustomer additions grew more than 50%. Charternoted that its cash and equivalents as of December 10 was in excess of $900 million.

As of its most recent balance sheet, Charter also had over $21 billionin long-term debt and almost $24 billion in total liabilities.

Unfortunately, the company is waiting until there is very limitedaccess to the capital markets.  If the bondholders don’t want to seizecontrol of a highly leveraged cable operator, then they may have toenter into discussions with the company. The strategy of waiting until there is limited access to capitalmarkets is an all-or-none Hail Mary pass.  It leaves the options on allsides very limited.  The company cannot claim that it had hopes thatthis would change.  It is not a new situation.  Management’s only defense is that they did not want to read in media and analyst reports what was being said about the company so that it could focus on operations.  If that defense is employed, then an endorsement of driving companies into the dirt will be given the proverbial green-light.

This was also added to our list of companies which are unlikely to makeit in their current forms in 2009.  That list was updated lastnight.

Jon C. Ogg
December 12, 2008