Cable Ready for Shift In Bank Ranks

9/26/2008 8:00 PM Eastern

The decision by Goldman Sachs and Morgan Stanley to become bank holding companies — thus eliminating the last two independent investment banks on Wall Street — shouldn't have an adverse effect on cable companies, according to analysts.

Investment banks have been big supporters of cable — helping to finance deals, underwriting debt and stock offerings and providing mergers and acquisitions services practically since the industry's inception. And while the conversion of Goldman and Morgan Stanley will limit the amount of leverage they will be able to take on and put them under greater regulatory scrutiny, their dealmaking won't die.

Ranking the Dealmakers
Top financial advisers to North American cable, telecom, broadcast and Internet-services companies, 2007
Company Number of Deals
SOURCE: Thomson Financial data
1. RBC Daniels/RBC Capital Markets46
2. Goldman Sachs17
3. Houlihan, Lokey, Howard & Zukin16
4. UBS16
5. Morgan Stanley15

“They won't be allowed to have as much leverage as they have in the past, which means their return on equity should decline and therefore the pay of the big producers will probably come down because lower risk means lower return,” said Miller Tabak media analyst David Joyce, himself a former investment banker. “In terms of deal-making prowess, there will be some duplicative positions on the Street so there might be fewer opinions, fewer coverage officers. It could result in some new boutiques cropping up.”

Goldman has been an active player in the cable space for years, on both the network and systems sides. Most recently, the Wall Street giant is serving as a lead financial adviser (with Citigroup) to Time Warner Inc. in its plan to separate its Time Warner Cable assets; and is a major investor in cable sports programmer YES Network.

Goldman has consistently been among the top five media dealmakers — in 2007, according to Thomson Financial, it completed 17 deals. Between 2000 and 2007 Goldman completed 183 media and telecom deals, according to Thomson.

Michael DuVally, a spokesman for Goldman, said that the change in regulatory status will have no effect on its participation in the cable industry.

“We intend to conduct business as usual in that sector,” DuVally said.

Morgan Stanley was also among the top-five media dealmakers in 2007, completing 15 deals in the space and 157 deals between 2000 and 2007, according to Thomson.

Morgan Stanley representatives did not return a request for comment by press time.

Joyce said both Goldman and Morgan Stanley will likely continue to perform investment-banking functions, although they will no longer be considered to be investment banks.

The analyst added that over time, the reduction in the number of large independent investment banks — Lehman Bros. went bankrupt and Merrill Lynch was bought by Bank of America at the beginning of the crisis earlier this month — could have an effect on pricing in the future.

Joyce said that debt pricing and advisory fees could be less competitive in the future simply because there will be fewer sources. But he added that would only happen after the economy comes out of crisis mode. In the current state of the economy, nobody is doing leverage deals.

“Right now, the debt market is still in sort of a catatonic state,” Joyce said.

But for the most part, cable operators who would need to tap the debt markets already have. Joyce pointed to Time Warner Cable, which completed a $5 billion debt offering in June which will be used to pay the $10.9 billion dividend the cable company will issue to shareholders as part of its full separation from Time Warner Inc. later this year.

The rest of the money for the dividend will likely be raised closer to the separation date, he added.

One thing that could be affected is possible systems sales, Joyce added. Earlier this year, Comcast put nonstrategic systems with 400,000 subscribers, on the block. That will likely be put on hold as the debt markets shake out, Joyce said.

“The only things that can get done are those that don't involve cash,” Joyce said. “It would have to be systems swaps, if anything.”

Moody's Investor Service senior vice president Russell Solomon, who mainly follows high-yield cable debt, said that interest rates on debt instruments will likely be impacted over the short term. But he added that most companies in the cable industry won't need to tap those markets for at least a year.

Charter Communications did several debt refinancings and exchanges earlier in the year and has no major maturities due until 2010, Solomon said. Cablevision Systems has a $1.4 billion maturity due in the third quarter of 2009, but that is at least 12 months from now. Hopefully, by that time, the credit markets will have recovered.

“We don't anticipate any radical changes,” Solomon said. “It's always been a well-financed sector and there is no reason to believe that it won't remain that way.”

Moody's continues to be bullish on the cable industry — it issued a positive outlook on the sector on Sept. 23, reflecting the credit rating agency's expectation of healthy fundamental business and credit conditions for the next 12 to 18 months. Solomon said that cable's performance versus satellite and especially telco competition has been strong and appears to be gaining steam.

In a statement, Moody's said cable companies have continued to report strong revenue and cash flow growth, fueled in part by the triple play bundle of voice, video and data services. Moody's added that not only are cable companies meeting the competitive challenge, but in the case of the telephone companies they appear to be taking away more market share (phone customers) than they are losing (video customers).

“The cable companies have shown signs that they are doing exactly what we thought they could do,” Solomon said in an interview.

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