M&A

17 November, 2009

UPDATE 1-Judge approves Charter's bankruptcy exit plan

*Judge formally approves reorganization plan

*CEO says bankruptcy exit could be within weeks

*CEO says will look at clustering deals

(Updates with quotes, background, CEO interview)

By Emily Chasan

NEW YORK, Nov 17 (Reuters) - A U.S. bankruptcy judge on Tuesday formally approved Charter Communications' (CHTRQ.PK) reorganization plan, paving the way for the cable television operator to exit Chapter 11.

In an 82-page opinion, Judge James Peck, rejected arguments from the company's senior lenders led by JPMorgan Chase & Co (JPM.N) that Charter's reorganization plan was invalid because it had violated terms of its loan agreement. Charter's plan was based, controversially, on reinstating $11.4 billion of its senior bank debt at below-market rates upon its emergence from bankruptcy.

Neil Smit, chief executive of Charter, said in an interview on Tuesday that he hopes the company will be able to emerge from bankruptcy protection "in the next several weeks."

Charter, which is controlled by Microsoft Corp co-founder Paul Allen, filed for bankruptcy protection in March, buckling under the weight of $21.7 billion in debt, but said at the time it had reached agreements with key stakeholders that would allow it to exit bankruptcy in a matter of months.

Lawyers for JPMorgan had argued that Charter was unable to pay its debts as they came due before it filed for bankruptcy, putting it in violation of loan terms, and that the reorganization plan triggered a 'change of control' default clause because Allen would no longer have full equity control of the business when it emerges from bankruptcy.

Under the plan, Allen will lose up to $8 billion which he has previously invested in Charter equity but would retain a 35 percent voting interest in the company. Private equity firms Apollo, Crestview, Franklin Templeton and Oaktree, which hold the company's bonds and are injecting new capital into Charter, would hold most of the reorganized Charter's shares.

But Judge Peck rejected those arguments saying "the senior lenders have been paid everything that they are owed," Peck wrote.

Judge Peck, who described Charter's bankruptcy as one of "the most ambitious and contentious" in history, said its bankruptcy plan was legal and in the best interest of the company. He noted, however, that it was changing the structure of the company.

"No one seriously disputes that Mr. Allen is walking away from his investment in Charter and is agreeing to maintain his voting power as a structuring device that benefits Charter and its stakeholders," Judge Peck wrote in his opinion. "In practical terms, Charter will cease to be a Paul Allen company."

Charter, the fourth-largest U.S. cable operator, shed about $8 billion of debt in the bankruptcy and is getting $1.6 billion in new capital from the private equity bondholders who will be able to appoint four board members of the new company. Allen will also be able to appoint four board members.

The new Charter expects to have positive cash flow immediately, and that its bankruptcy will eliminate significant debt restructuring concerns through at least 2013.

"It gives us more flexibility," Smit said. "Throughout the process we've been very focused... and we've seen great operational results throughout the period."

Smit said earnings before interest taxes depreciation and amortization, rose 7.8 percent in the third quarter and revenue also rose, noting strength in its bundling and "triple-play" programs. He also said the company would continue to focus on making deals or swaps with other cable operators that would help it cluster its services into adjacent markets.

"We will continue to focus on M&A activity that's oriented around clustering, but most of our energy will go toward the customer as it has in the past," Smit said.

The case in re: Charter Communications Inc., U.S. Bankruptcy Court, Southern District of New York, No. 09-11435. (Reporting by Emily Chasan; Editing by Valerie Lee)

Source: http://www.reuters.com