Dear Mr. Berko:

Charter Communications is trading at a little more than $1 a share, and I’m thinking of speculating with a 20,000-share position. As you may know, the company was founded by Paul Allen, the co-founder of Microsoft, and he’s Charter’s biggest investor. I know the company has some financial troubles, but I think Allen will come back and manage Charter, because he has an $8 billion investment in the company, and he doesn’t want to lose that money. I would appreciate your comments and recommendations.

P.E., Santa Monica, Calif.

Dear P.E.:

Barry Bonds has hit more home runs than any professional baseball player in the past 25 years. But Barry’s home-run prowess doesn’t mean that he has the skills to manage a winning baseball team, market the team to the public, coach pitchers to throw fastballs, run a front office, handle player negotiations or understand baseball accounting. And the fact that Paul Allen was one of the founders of Microsoft Corp. (now drifting in still waters) does not mean he would have similar success in other business ventures. Far from it — Allen is still one of the greenest bananas in the bunch.

A lot of ink has been spilled about Allen’s troubles in other business investments. When he lives like a spoiled pasha on the interest that his interest earns, a loss of a few billion dollars has about as much effect on Allen’s balance sheet as would the arrival of another fly at a slaughterhouse.

Allen isn’t a bright man, but he has allowed others to manipulate his ego into thinking he is by investing in their cockamamie ideas. In the process, he has lost billions of dollars. Bill Gates hasn’t lost money participating in other business ventures, because he has common sense and knows his limitations.

Allen invested $8 billion in Charter Communications Inc. (CHTR-$1.11), and the magic of his name persuaded a bunch of suckers to purchase shares at $19 in a 1999 initial public offering. The company has grown to be the fourth-largest cable system operator because Allen’s Microsoft reputation attracted acquisitions willing to accept CHTR stock.

However, CHTR does not know the meaning of the word “profit.” At last year’s end, the company had collected cumulative losses of nearly $10 billion and $32 billion in contractual obligations, of which nearly $16 billion comes due by 2009. The company is so poorly run that it has had four chief executive officers in the past four years, and the board of directors was on the brink of suing Allen to keep a financial promise he made to the company in 2002. This is a messed-up company whose projected 2006 losses of $4.47 per share exceed its share price by a factor of 4. Geez … at least today’s share price will buy a breakfast burrito at McDonald’s.

Now Allen is certainly not known for his business acumen, but I suspect he’s familiar with the “first rule of holes”: when you find yourself in a hole, stop digging. So don’t bank on Allen’s largesse; he may not be bright but he’s certainly not dumb. CHTR has the worst balance sheet in the industry. Its customer base has fallen by 6 percent in the past two years as subscribers have defected to satellite and to Verizon and AT&T, which are plucking customers from some of CHTR’s markets. The company has a negative cash flow, it burns cash at the rate of $200 million every quarter, and interest costs absorb 35 percent of revenues.

I think Allen is more interested in spending time on his $225 million yacht, watching his Portland Trail Blazers shoot hoops and investing $2 billion in agricultural projects in Bangladesh than in spending time or money on CHTR. The company has a hugely negative book value ($7.50 a share), margins are under intense pressure from rising programming and marketing costs, and there’s little money remaining for infrastructure upgrades. Low morale at headquarters and in the field is hurting productivity, while continuing heavy subscriber losses might force the company into bankruptcy.

I doubt that Allen will write a check and come to the rescue, and I think CHTR is an incredibly stupid speculation.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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