Quarterly report pursuant to Section 13 or 15(d)

Investment in Charter Accounted for Using the Equity Method

v3.19.1
Investment in Charter Accounted for Using the Equity Method
3 Months Ended
Mar. 31, 2019
Investment in Charter Accounted for Using the Equity Method  
Investment in Charter Accounted for Using the Equity Method

(4) Investment in Charter Accounted for Using the Equity Method

Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter. The investment in Charter is accounted for as an equity method affiliate based on our ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of March 31, 2019, the carrying value of Liberty Broadband’s ownership in Charter was approximately $11,999 million. The market value of Liberty Broadband’s ownership in Charter as of March 31, 2019 was approximately $18,758 million, which represented an approximate economic ownership of 24.2% of the outstanding equity of Charter as of that date.

Pursuant to proxy agreements with GCI Liberty and A/N (the “GCI Liberty Proxy” and “A/N Proxy”, respectively), Liberty Broadband has an irrevocable proxy to vote certain shares of Charter common stock owned beneficially or of record by GCI Liberty and A/N, for a five year term expiring May 18, 2021, subject to extension upon the mutual agreement of both parties, subject to certain limitations.

As a result of the A/N Proxy and the GCI Liberty Proxy, Liberty Broadband controls 25.01% of the aggregate voting power of Charter and is Charter’s largest stockholder.

Additionally, so long as the A/N Proxy is in effect, if A/N proposes to transfer common units of Charter Communications Holdings, LLC (which units are exchangeable into Charter shares and which will, under certain circumstances, result in the conversion of certain shares of Class B Common Stock into Charter shares) or Charter shares, in each case, constituting either (i) shares representing the first 7.0% of the outstanding voting power of Charter held by A/N or (ii) shares representing the last 7.0% of the outstanding voting power of New Charter held by A/N, Liberty Broadband will have a right of first refusal (“ROFR”) to purchase all or a portion of any such securities A/N proposes to transfer. The purchase price per share for any securities sold to Liberty Broadband pursuant to the ROFR will be the volume-weighted average price of Charter shares for the two trading day period before the notice of a proposed sale by A/N, payable in cash. Certain transfers are permitted to affiliates of A/N, subject to the transferee entity entering into an agreement assuming the transferor’s obligations under the A/N Proxy.

Investment in Charter

The excess basis in our investment in Charter of $3,351 million as of March 31, 2019 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

Property and equipment

    

$

302

 

328

Customer relationships

 

 

736

 

721

Franchise fees

 

 

1,836

 

1,821

Trademarks

 

 

29

 

29

Goodwill

 

 

1,238

 

1,202

Debt

 

 

(87)

 

(105)

Deferred income tax liability

 

 

(703)

 

(698)

 

 

$

3,351

 

3,298

 

Property and equipment and customer relationships have remaining useful lives of 7 years and 11 years, respectively, and franchise fees, trademarks and goodwill have indefinite lives. The excess basis of outstanding debt is amortized over the contractual period using the straight-line method. The increase in excess basis for the three months ended March 31, 2019, was primarily due to Charter’s share buyback program. The Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $25.6 million and $28.7 million, net of related taxes, for the three months ended March 31, 2019 and 2018, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt. 

The Company had a dilution loss of $41.4 million and $26.8 million during the three months ended March 31, 2019 and 2018, respectively. The dilution losses for the periods presented were attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book basis per share.

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

Charter condensed consolidated balance sheets

 

 

 

 

 

 

 

 

 

    

March 31, 2019

 

December 31, 2018

 

Current assets

 

$

3,926

 

2,944

 

Property and equipment, net

 

 

34,859

 

35,126

 

Goodwill

 

 

29,554

 

29,554

 

Intangible assets, net

 

 

76,316

 

76,884

 

Other assets

 

 

2,602

 

1,622

 

Total assets

 

$

147,257

 

146,130

 

Current liabilities

 

 

11,950

 

12,095

 

Deferred income taxes

 

 

17,473

 

17,389

 

Long-term debt

 

 

70,567

 

69,537

 

Other liabilities

 

 

3,624

 

2,837

 

Equity

 

 

43,643

 

44,272

 

Total liabilities and shareholders’ equity

 

$

147,257

 

146,130

 

Charter condensed consolidated statements of operations

 

 

 

 

 

 

 

Three months ended 

 

March 31,

 

2019

 

2018

Revenue

$

11,206

 

10,657

Cost and expenses:

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

7,236

 

6,836

Depreciation and amortization

 

2,550

 

2,710

Other operating (income) expenses, net

 

(5)

 

69

 

 

9,781

 

9,615

Operating income

 

1,425

 

1,042

Interest expense, net

 

(925)

 

(851)

Other income (expense), net

 

(64)

 

60

Income tax benefit (expense)

 

(119)

 

(28)

Net income (loss)

 

317

 

223

Less: Net income attributable to noncontrolling interests

 

(64)

 

(55)

Net income (loss) attributable to Charter shareholders

$

253

 

168