Quarterly report pursuant to Section 13 or 15(d)

Investment in Charter Accounted for Using the Equity Method

v3.20.2
Investment in Charter Accounted for Using the Equity Method
6 Months Ended
Jun. 30, 2020
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 voting and ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of June 30, 2020, the carrying and market value of Liberty Broadband’s ownership in Charter was approximately $12,307 million and $27,597 million, respectively.  Liberty Broadband’s ownership in Charter is 26.4% of the outstanding equity of Charter as of June 30, 2020.  

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.

Liberty Broadband’s overall voting interest (23.4% at June 30, 2020) is diluted by the outstanding A/N interest in a subsidiary of Charter because the A/N interest has voting rights in Charter. 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.

Liberty’s equity ownership in Charter (on a fully diluted basis) is capped at the greater of 26% or the cap on its voting interest.  Liberty’s voting interest in Charter is capped at the greater of (x) 25.01% (or 0.01% above the person or group holding the highest voting percentage of Charter) and (y) 23.5% increased one-for-one to a maximum of 35% for each permanent reduction in A/N’s equity interest in Charter below 15%. As of June 30, 2020, Liberty does not believe it has exceeded the cap on its equity ownership in Charter.

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 Charter 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 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.

During the six months ended June 30, 2020, Liberty Broadband exercised its preemptive right to purchase an aggregate of approximately 35 thousand shares of Charter’s Class A common stock for an aggregate purchase price of $14.9 million.

Investment in Charter

The excess basis in our investment in Charter of $4,555 million as of June 30, 2020 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

June 30,

December 31,

2020

2019

Property and equipment

    

$

236

225

Customer relationships

 

1,180

1,043

Franchise fees

 

2,182

1,996

Trademarks

 

29

29

Goodwill

 

1,883

1,630

Debt

 

(70)

(9)

Deferred income tax liability

 

(885)

(817)

$

4,555

4,097

Property and equipment and customer relationships have weighted average remaining useful lives of approximately 5 years and 9 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 six months ended June 30, 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 $41.7 million and $30.4 million, net of related taxes, for the three months ended June 30, 2020 and 2019, respectively, and expenses of $81.8 million and $56.0 million, net of related taxes, for the six months ended June 30, 2020 and 2019, 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 $46.0 million and $16.3 million during the three months ended June 30, 2020 and 2019, respectively, and a dilution loss of $105.3 million and $57.7 million during the six months ended June 30, 2020 and 2019, 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

    

June 30, 2020

December 31, 2019

 

Current assets

$

4,770

6,537

Property and equipment, net

 

34,074

34,591

Goodwill

 

29,554

29,554

Intangible assets, net

 

73,808

74,775

Other assets

 

2,930

2,731

Total assets

$

145,136

148,188

Current liabilities

9,142

12,385

Deferred income taxes

 

17,789

17,711

Long-term debt

 

77,663

75,578

Other liabilities

 

4,141

3,703

Equity

 

36,401

38,811

Total liabilities and shareholders’ equity

$

145,136

148,188

Charter condensed consolidated statements of operations

Three months ended

    

Six months ended

June 30,

June 30,

2020

2019

2020

2019

Revenue

$

11,696

11,347

23,434

22,553

Cost and expenses:

Operating costs and expenses (excluding depreciation and amortization)

 

7,297

7,244

14,729

14,480

Depreciation and amortization

 

2,428

2,500

4,925

5,050

Other operating (income) expenses, net

 

2

62

9

57

9,727

9,806

19,663

19,587

Operating income

1,969

1,541

3,771

2,966

Interest expense, net

 

(957)

(945)

(1,937)

(1,870)

Other income (expense), net

30

(126)

(296)

(190)

Income tax benefit (expense)

 

(166)

(84)

(195)

(203)

Net income (loss)

876

386

1,343

703

Less: Net income attributable to noncontrolling interests

(110)

(72)

(181)

(136)

Net income (loss) attributable to Charter shareholders

$

766

314

1,162

567