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ANALYSIS-Charter's bid for Time Warner Cable hinges on Rutledge's skill

NEW YORK, Jan 29 (Reuters) - As Charter Communications Inc campaigns for investor support for its $37.3 billion bid for Time Warner Cable Inc, Charter Chief Executive Officer Tom Rutledge and his turnaround skills are front and center of that effort.

But Rutledge's track record as chief operating officer of Cablevision Systems Corp from 2004 to 2011 shows that he may not be quite the miracle worker that allies like to portray him as.

In meetings with Time Warner Cable shareholders, Rutledge, 60, and his management team have pledged to revive the fortunes of the second-largest U.S. cable operator. Time Warner Cable suffers from one of the industry's poorest customer service records, has lost subscribers at a higher rate than other large operators, and lags in the rollout of new technology.

In contrast, Rutledge has pointed to his successes at Charter, where he has stemmed some subscriber losses and boosted its fortunes since he was appointed CEO in February 2012, thanks in part to measures he put in place to simplify pricing and improve video technology.

Rutledge's performance at Cablevision, however, was more mixed, especially near the end of his tenure. While he was at the Bethpage, New York-based company, it increased its market share to industry-leading penetration rates, but by the time of his departure, total customer growth had stalled, with many customers defecting to Verizon Communications Inc's FiOS video service.

Cablevision's stock, which roughly doubled during his first seven years as COO, fell 15 percent in 2011. The Dolan family, Cablevision's controlling shareholder, took on a more active role and made some management changes. In December of that year, Rutledge resigned.

"Rutledge has this halo around him that I think is somewhat suspect. There was frankly a lot of low hanging fruit at the time in terms of driving data penetration and capturing voice share," said Brean Capital analyst Todd Mitchell. "He has a halo because of what he did there but it did not last beyond him and it looks like it was coming apart before he left."

Mitchell said he is skeptical that Charter can turn around Time Warner Cable, pointing to tough competition from Verizon's FiOS in its largest market, New York. While Time Warner Cable's share price has increased almost five fold since it was spun off from Time Warner Inc in 2009, the operator's growth has matured in many of its territories.

A Charter spokesman declined to make Rutledge available for an interview. "Tom's operational performance as COO of Cablevision ... and CEO of Charter Communications for the past two years is on full display," the spokesman said, adding that Charter's management team is focused on its turnaround.

LOADING UP ON DEBT

To pay Time Warner Cable shareholders, Charter has said it will raise about $25 billion in debt and bring the combined company's leverage ratio - a measure of indebtedness - to five times its earnings before interest, tax, depreciation and amortization (EBITDA), higher than Time Warner Cable's current ratio of about three times.

Time Warner Cable shareholders will also receive Charter shares as part of the potential deal, so they are not cashing out completely and will need to be convinced that Rutledge can deliver on promises to make the combined company grow.

Rutledge has told shareholders that there will be about $500 million in synergies in the first year, and that he will employ much of the strategy he has at Charter. He has said he will introduce a better pricing scheme, make Time Warner Cable's systems all-digital, which should make the product more advanced, and also improve customer service, an area in which the company has traditionally scored low in consumer surveys.

Rutledge is credited with being an expert at managing fleets of workers in the field, improving customer service and pioneering the concept of the "triple play," the combination of Internet, video and phone service that became the marketing standard in the industry.

He joined Cablevision as the president of cable and communications in 2002, after he was passed over at Time Warner Cable for a CEO position that went to Glenn Britt. Cablevision was already enjoying rapid growth in its tightly clustered market outside of New York City, but Rutledge helped it expand into Internet and voice services through the "triple play" offering.

Rutledge was paid well for his performance - $23 million in 2011, $28 million in 2010 and $26 million in 2009. He was viewed as a "rock star" inside Cablevision, according to former colleagues, and commuted to work from Connecticut via a helicopter provided by the company. Still, Rutledge had a down-to-earth manner and often showed respect for cable workers in the field since he started himself as a trainee at a company that later became part of Time Warner Cable.

FIERCE COMPETITION

Rutledge, who loves to ski and owns a home in Colorado, also has a reputation as a tough negotiator. Cablevision fought high-profile battles with media companies over fees the cable company had to pay to carry their content - and those fights sometimes cost the company subscribers.

In 2010, Cablevision lost 35,000 subscribers after a fee dispute with Fox caused it to blackout Cablevision during Major League Baseball's World Series.

By 2011, analysts say Rutledge had fallen out of favor with the Dolan family, especially CEO James Dolan.

The Federal Communications Commission published a report, entitled "Measuring Broadband America," that found Verizon's FiOS service was the top provider at delivering on its advertised Internet speeds while Cablevision was the worst performer.

Dolan held Rutledge personally responsible for letting Cablevision's broadband service fall behind its peers, according to BTIG analyst Rich Greenfield.

A spokesman for Cablevision declined to comment, citing company policy not to discuss former employees.

That year, Cablevision also missed a target set five years earlier for cumulative adjusted operating cash flow of about $1 billion, said Leo Hindery, a former cable executive who is a managing partner of private equity firm Intermedia Partners.

The year 2011 was also tough for Time Warner Cable. Like Cablevision, it was hit by competition from Verizon's FiOS and lost video subscribers every quarter.

Greg Maffei, the CEO of Liberty Media, which is Charter's biggest shareholder, does not hold Cablevision's performance in 2011 against Rutledge. Maffei said in a statement last week that "a key reason Liberty invested in Charter was the strength of Tom Rutledge and his management team."

Since taking over Charter, Rutledge has streamlined management, simplified pricing and packaging and focused the sales effort on "triple play," according to UBS analyst John Hodulik.

Charter's video product has been improved by adding more high definition content, reduced the rate of cancellations and increasing revenue per subscriber, he said. Hodulik said he could see shares of the combined company rise to $200 per share in 18 months after a deal, due to free cash flow growth and Rutledge's operating playbook.

Since he became CEO, Charter shares have more than doubled, including gains logged after news of a Time Warner Cable bid emerged. It is also true that Charter, which emerged from bankruptcy in 2009, started from a low base. Its market share is low compared to rivals and it suffered from under-investment for years.

Rutledge's supporters say he will be able to improve Time Warner Cable's operations as well. But critics say Time Warner Cable could make similar changes on its own, without Charter.

"Given enough time, Time Warner Cable management would probably be able to narrow the gap between its performance and that of Comcast. There is, after all, little secret sauce in the cable business," said MoffettNathanson analyst Craig Moffett.

(Additional reporting by Ronald Grover in Los Angeles; Editing by Tiffany Wu and Grant McCool)

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