New York -- Cable valuations should continue their upward
climb in the coming years, according to a panel of financial analysts and deal brokers
speaking last week at a Kagan Seminars Inc. conference here.
Waller Capital Corp. senior vice president and partner
Joseph Duggan said the main driver for even higher valuations was the fact that cable
operators, for the most part, are at the tail end of upgrading their systems. Now that
money is no longer being pumped into rebuilding plant, it can be used to acquire other
"I think we are at the appropriate end of the capital
cycle that has crushed cable operators," Duggan said. "They are reaching the end
of having to do big rebuilds."
To illustrate his point, Duggan said his firm recently
brokered a deal for a system with 150,000 customers at $6,000 per subscriber -- well above
the high end of recent deals, which has been between $4,000 and $5,000 per subscriber. He
would not name the seller or buyer.
"Historically, cable operators invested a substantial
amount of money for their own programming," Duggan said. "Today, we're
seeing launch incentives and revenue sharing. And the current cable leadership has been
around for a long time in a more stable environment. These are well-schooled guys who have
seen the mistakes that have been made. We're not going to see another Qube
Duggan was referring to Warner Communications' (now
Time Warner Inc.) pioneering interactive-television service, which launched in Columbus,
Ohio, in the 1970s, and which was later abandoned after substantial investment.
However, Duggan added that cable operators would not pay
premium prices for just any system. As in the past, prices will be driven by three
factors: demographics, density and geography.
But it's not just good management and more money that
will cause valuations to rise. Donaldson, Lufkin & Jenrette Inc. media and
communications analyst Jim McVeigh said new services are also being factored into
cash-flow multiples in a big way, and there is room for expansion.
McVeigh estimated that in today's environment,
cable-television service alone is worth 10 times cash flow. Adding digital services to the
mix adds a multiple of two, and high-speed data adds another three times cash flow.
"And high-speed telephony gets you to 18 [times cash
flow]," he added.
While McVeigh believes Internet access has been given full
value in current cash-flow multiples, he said the full impact of electronic commerce has
not been adequately accounted for.
"[The public markets] don't realize the magnitude
[of e-commerce]," McVeigh said. "The valuations aren't there yet."
McVeigh cautioned that big-time acquisitions are not for
every cable operator, and that for some, remaining small is an advantage.
"How big do you need to be?" he asked. "If
you're at 1 million subscribers and you're well-clustered, you can be very
successful. Once you have two or three players rationalizing what's going to happen
with the technology, and [you add] the fact that we have relatively little competition in
a lot of areas with open systems, it gives a unique benefit where scale doesn't give
you that much of an advantage."
Daniels & Associates Inc. executive vice president
Gregory Ainsworth said cable companies have been able to obtain financing for deals much
more easily, which could also fuel higher multiples.
"During the last big downturn, there was the conflict
of reregulation and misapplied financing schemes coming due," Ainsworth said.
"Equity is a much bigger part of the equation now. You don't yet see financing
schemes with multiple levels of capital, where if you don't perfectly hit your
forecast numbers, then the game is up."