Investment in Charter Accounted for Using the Equity Method
|9 Months Ended|
Sep. 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 September 30, 2020, the carrying and market value of Liberty Broadband’s ownership in Charter was approximately $12,450 million and $33,781 million, respectively. Liberty Broadband’s ownership in Charter is 27.1% of the outstanding equity of Charter as of September 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 (24.0% at September 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 Broadband’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 Broadband’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 September 30, 2020, Liberty Broadband 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 thetrading 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 nine months ended September 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 $5,167 million as of September 30, 2020 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):
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 nine months ended September 30, 2020 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 $25.5 million and $32.7 million, net of related taxes, for the three months ended September 30, 2020 and 2019, respectively, and expenses of $107.3 million and $88.7 million, net of related taxes, for the nine months ended September 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 $35.3 million and $11.2 million during the three months ended September 30, 2020 and 2019, respectively, and a dilution loss of $140.6 million and $68.9 million during the nine months ended September 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
Charter condensed consolidated statements of operations
The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef