* Liberty CEO calls Charter 'our kind of business'
* Analysts see Malone aiming for full control
* Consolidation possible down the road
By Liana B. Baker
March 19 Liberty Media Corp will buy a 27 percent stake in Charter Communications Inc, signaling Chairman John Malone's return to his roots in cable television and a renewed appetite for consolidation in the sector.
Chief Executive Greg Maffei said Liberty sees opportunities in U.S cable and that low interest rates made the deal attractive. Private equity firm Apollo Management was also in a "selling mood," Maffei said.
"I do think this is a statement about cable in the sense that we see the opportunity," Maffei said in an interview, adding that Charter's subscription model and sustainable cash flow is "our kind of business."
Liberty will take a 27.3 percent stake in Charter for about $2.62 billion. It cannot raise its stake above 35 percent until January 2016, when it is allowed to increase its ownership to 39.99 percent. If it wants to raise its stake above that, it would need to negotiate with the company, Maffei said.
Liberty will pay $95.50 for each Charter share, a discount of 2.6 percent to Charter's Monday close of $98.04. The deal is expected to close in the first half of the second quarter.
Liberty will buy the stake from Apollo Management, Oaktree Capital Management and Crestview Partners, the companies said in a joint statement. After the deal, Crestview will own 7.4 percent of Charter shares while Oaktree will own 2.2 percent.
Maffei said he sees opportunities for further mergers and acquisitions in the cable industry down the road.
"We like the business investment plan at Charter, but if attractive acquisition opportunities like Bresnan arise, we will support the management team, Maffei said.
Charter purchased the Western cable unit of Cablevision for $1.625 billion in February.
Analysts said Liberty Chairman Malone, nicknamed "the king of cable, may be using a tactic he has employed before: taking a minority stake in a company and building a controlling interest. He used a similar strategy with Sirius XM, said Macquarie analyst Amy Yong.
Malone and Maffei will sit on Charter's board.
Malone "is probably going to have a pretty big say in the company's future over the next few years. This will accelerate capital returns and take advantage of Charter's tax assets to consolidate the cable industry some more," Yong said, adding she expects the company to perform a share buyback.
Asked if Charter would repurchase shares, Maffei said it was too early to tell and Liberty would have to consult management.
GOOD ENTRY POINT
Charter provides video, Internet, and telephone services to about 5.2 million residential and business customers in 25 U.S. states, trailing Time Warner Cable and Comcast .
ISI analyst Vijay Jayant said now is a good time for Malone to re-enter the U.S. cable market while there are low interest rates and signs of an improving housing market.
Charter is in the midst of a turnaround. The company, once controlled by Microsoft co-founder Paul Allen, filed for bankruptcy in 2009 but has emerged and is now led by Cablevision's former chief operating officer Tom Rutledge.
"We expect the turnaround underway at Charter by its relatively new management team will make it the highest-growth U.S. cable operator over the next three years," ISI's Jayant said.
KING OF CABLE
Malone founded Tele-Communications Inc and grew it into the largest cable operator in the United States before selling it to AT&T Inc. That asset now belongs to No. 1 cable operator Comcast. In recent years, Malone's cable ambitions have focused in Europe.
Malone is also chairman of Liberty Global Inc, the international cable operator that purchased Virgin Media Inc , a UK company, for about $15.75 billion in February.
The holding company Liberty Media has been tweaking its portfolio in recent months and has more than $1 billion in cash, said Yong, the Macquarie analyst. It spun off the premium TV cable network Starz in January, increased its stake to gain full control of satellite radio operator Sirius XM Radio Inc and bought more shares in concert promoter Live Nation Entertainment Inc.
Liberty said it had the right to designate up to four directors for appointment to the Charter board. Besides Malone and Maffei, Liberty said it would add Nair Balan, chief technology officer of Liberty Global and Michael Huseby, chief financial officer of Barnes & Noble Inc as directors.
Liberty was advised by LionTree Advisors and Baker Botts LLP. Charter was advised by Kirkland & Ellis LLP. Apollo was advised by Citi and Wachtell, Lipton, Rosen & Katz.
Oaktree was advised by Citi, Goldman Sachs and Paul, Weiss, Rifkind, Wharton & Garrison LLP. Crestview was advised by Davis Polk & Wardwell LLP.
Charter shares rose 2 percent to $99.91 after closing more than 10 percent higher on Monday after the first reports Liberty might take a stake. Liberty shares rose 68 cents or 0.6 percent to $111.34 on Tuesday.