Investment in Charter Accounted for Using the Equity Method
|9 Months Ended|
Sep. 30, 2022
|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 and the Combination, 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, 2022, the carrying and market value of Liberty Broadband’s ownership in Charter was approximately $11.5 billion and $14.7 billion, respectively. We own an approximate 31.1% economic ownership interest in Charter, based on shares of Charter’s Class A common stock issued and outstanding as of September 30, 2022.
Upon the closing of the Time Warner Cable merger, the Second Amended and Restated Stockholders Agreement, dated as of May 23, 2015, by and among Charter, Liberty Broadband and Advance/Newhouse Partnership, as amended (the “Stockholders Agreement”), became fully effective. Pursuant to the Stockholders Agreement, Liberty Broadband’s equity ownership in Charter (on a fully diluted basis) is capped at the greater of 26% or the voting cap (“Equity Cap”). As of September 30, 2022, due to Liberty Broadband’s voting interest exceeding the current voting cap of 25.01%, our voting control of the aggregate voting power of Charter is 25.01%. Under the Stockholders Agreement, Liberty Broadband has agreed to vote (subject to certain exceptions) all voting securities beneficially owned by it, or over which it has voting discretion or control that are in excess of the voting cap, in the same proportion as all other votes cast by public stockholders of Charter with respect to the applicable matter.
In February 2021, Liberty Broadband was notified that its ownership interest, on a fully diluted basis, had exceeded the Equity Cap set forth in the Stockholders Agreement. On February 23, 2021, Charter and Liberty Broadband entered into a letter agreement in order to implement, facilitate and satisfy the terms of the Stockholders Agreement with respect to the Equity Cap. Pursuant to this letter agreement, following any month during which Charter purchases, redeems or buys back shares of its Class A common stock, and prior to certain meetings of Charter’s stockholders, Liberty Broadband will be obligated to sell to Charter, and Charter will be obligated to purchase, such number of shares of Class A common stock as is necessary (if any) to reduce Liberty Broadband’s percentage equity interest, on a fully diluted basis, to the Equity Cap (such transaction, a “Charter Repurchase”). The per share sale price for each share of Charter will be equal to the volume weighted
average price paid by Charter in its repurchases, redemptions and buybacks of its common stock (subject to certain exceptions) during the month prior to the Charter Repurchase (or, if applicable, during the relevant period prior to the relevant meeting of Charter stockholders). Under the terms of the letter agreement, Liberty Broadband sold 4,952,224 and 3,962,155 shares of Charter Class A common stock to Charter for $2,602 million and $2,643 million during the nine months ended September 30, 2022 and 2021, respectively, to maintain our fully diluted ownership percentage at 26%. Subsequent to September 30, 2022, Liberty Broadband sold 468,388 shares of Charter Class A common stock to Charter for $183 million in October 2022.
Investment in Charter
The excess basis in our investment in Charter is allocated within memo accounts used for equity method accounting purposes as follows (amounts in millions):
Property and equipment and customer relationships have weighted average remaining useful lives of approximately 5 years and 8 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 change in excess basis for the nine months ended September 30, 2022 was primarily due to an increase in excess basis due to Charter’s share buyback program, partially offset by Liberty Broadband’s participation in Charter’s share buyback program. These impacts were more than offset by amortization expense during the period, resulting in a decrease in the excess basis in Charter from December 31, 2021 to September 30, 2022. The Company’s share of earnings (losses) of affiliate line item in the accompanying condensed consolidated statements of operations includes expenses of $57 million and $59 million, net of related taxes, for the three months ended September 30, 2022 and 2021, respectively, and expenses of $191 million and $181 million, net of related taxes, for the nine months ended September 30, 2022 and 2021, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt.
The Company had dilution losses of zero and $1 million during the three months ended September 30, 2022 and 2021, respectively, and dilution losses of $67 million and $98 million during the nine months ended September 30, 2022 and 2021, respectively. The dilution losses for the periods presented were primarily attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book basis per share, partially offset by a gain on dilution related to Charter’s repurchase of Liberty Broadband’s Charter shares during both the three and nine months ended September 30, 2022 and 2021.
Summarized unaudited financial information for Charter is as follows:
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