Quarterly report pursuant to Section 13 or 15(d)

Investments in Affiliates Accounted for Using the Equity Method

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Investments in Affiliates Accounted for Using the Equity Method
9 Months Ended
Sep. 30, 2014
Investments in Affiliates Accounted for Using the Equity Method  
Investments in Affiliates Accounted for Using the Equity Method

(5) Investments in Affiliates Accounted for Using the Equity Method

In May 2013, Liberty completed a transaction with investment funds managed by, or affiliated with, Apollo Management, Oaktree Capital Management and Crestview Partners to acquire approximately 26.9 million shares of common stock and approximately 1.1 million warrants in Charter for approximately $2.6 billion, which represented an approximate 27% beneficial ownership (including the warrants on an as if converted basis) in Charter at the time of purchase and a price per share of $95.50. Liberty funded the purchase with a combination of cash of approximately $1.2 billion on hand and new margin loan arrangements. Liberty allocated the purchase price between the shares of common stock and the warrants acquired in the transaction by determining the fair value of the publicly traded warrants and allocating the remaining balance to the shares acquired, which resulted in an excess basis in the investment of $2,532.3 million. The investment in Charter is accounted for as an equity method affiliate based on the ownership interest obtained and the board seats held by individuals appointed by Liberty.

Due to the amortization of amortizable assets acquired, losses due to warrant and stock option exercises at Charter (as discussed below) and the acquisition of additional shares of Charter, the excess basis has decreased to $2,349 million as of September 30, 2014 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

Property and equipment

    

$

417 

 

Customer relationships

 

 

636 

 

Franchise fees

 

 

1,359 

 

Trademarks

 

 

33 

 

Goodwill

 

 

933 

 

Debt

 

 

(215)

 

Deferred income tax liability

 

 

(814)

 

 

 

$

2,349 

 

 

Upon acquisition, Liberty ascribed remaining useful lives of 7 years and 13 years to property and equipment and customer relationships, respectively, and indefinite lives to franchise fees, trademarks and goodwill. Outstanding debt is amortized over the contractual period using the effective interest rate method. Amortization related to debt and intangible assets with identifiable useful lives is included in the Company’s share of earnings (losses) from affiliates line item in the accompanying combined statements of operations and aggregated $21.1 million and $20.3 million, net of related taxes, for the three months ended September 30, 2014 and 2013, respectively, and $62.0 million and $24.0 million, net of related taxes, for the nine months ended September 30, 2014 and 2013, respectively.

During the nine months ended September 30, 2014, Liberty purchased 897 thousand Charter shares for approximately $124.5 million. As of September 30, 2014, the carrying value of Liberty Broadband’s ownership in Charter was approximately $2,374 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2014 was approximately $4,201 million, which represented an approximate ownership of 25% and a beneficial ownership interest (including warrants on an as if converted basis) of 26% of the outstanding equity of Charter as of that date. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband borrowed $51.3 million to fund the exercise of the Charter warrants (see note 7).

Due to dilution from Charter warrant and stock option exercises by outside investors (employees and other third parties) at prices below Liberty Broadband’s book basis per share, the Company had losses of $11.0 million and $52.1 million during the three months ended September 30, 2014 and 2013, respectively, and losses of $61.2 million and $55.2 million during the nine months ended September 30, 2014 and 2013, respectively.

Summarized unaudited financial information for Charter is as follows (amounts in millions):

Charter consolidated balance sheet

 

 

 

 

 

 

 

    

September 30, 2014

 

Cash and cash equivalents

 

$

10 

 

Accounts receivable, net

 

 

270 

 

Property and equipment, net

 

 

8,305 

 

Goodwill

 

 

1,170 

 

Intangible assets, net

 

 

7,184 

 

Other assets

 

 

4,011 

 

Total assets

 

$

20,950 

 

Accounts payable and accrued liabilities

 

$

1,586 

 

Debt

 

 

17,595 

 

Deferred income tax liability

 

 

1,610 

 

Other liabilities

 

 

62 

 

Equity

 

 

97 

 

Total liabilities and shareholders’ equity

 

$

20,950 

 

 

Charter consolidated statement of operations

 

 

 

 

 

 

 

 

    

Three months

    

Nine months

 

 

 

ended

 

ended

 

 

 

September 30, 2014

 

September 30, 2014

 

Revenue

$

2,287 

 

6,748 

 

Operating costs and expenses

 

(1,518)

 

(4,444)

 

Depreciation and amortization

 

(535)

 

(1,568)

 

Other operating expenses

 

(16)

 

(42)

 

Interest expense, net

 

(217)

 

(638)

 

Gain (loss) on derivative instruments, net

 

 

(3)

 

Income tax expense, net

 

(59)

 

(188)

 

Net loss

$

(53)

 

(135)