New York -- As usual, cable bulls rode roughshod at
last week's Kagan Seminars Inc. Cable TV Values & Finance conference here.
The tone was set early by Century Communications Corp.
chairman and CEO Leonard Tow, who predicted that one-half of the industry's revenue
would come from voice and data services in 10 years.
Century, with 1.3 million subscribers, currently has just
5,000 cable-modem customers, it is selling its wireless-telephone subsidiary interest and,
according to a recent analyst report on the company, it "has not yet articulated a
But Tow, who controls a 93 percent voting stake in Century,
has been reported to be negotiating a possible sale of the company to billionaire Paul
Allen, although some published reports have said that those talks have broken off.
The fervor may have peaked when a closing-panel speaker,
Credit Suisse First Boston director Laura Martin, theorized that the entire industry would
be taken over by consumer-products companies within three years. At that time, Martin
said, publicly owned MSOs would be well on the way to realizing valuations of $3,000 per
home passed, up from the current $1,800.
In May, during a presentation at the National Show, Martin
pegged cable's per-home-passed potential value at about $2,200, factoring in new
"Since then, I have changed my entire thesis and
gotten more bullish," Martin said, explaining that Paul Kagan invited her to the
conference after seeing her National Show forecast.
Cable operators do have the numbers on their side, and they
can point to various uplifting events, including Allen's arrival, Microsoft
Corp.'s investment in Comcast Corp. and AT&T Corp.'s agreement to buy
Since the Dow Jones average peaked about two months ago,
cable stocks are down about 7 percent, while the Dow is 14 percent lower and the Standard
& Poor's 500 index is off by 12 percent, Salomon Smith Barney Inc. cable analyst
Spencer Grimes said.
Kagan data showed that publicly owned MSOs are trading at
about 10.4 times cash flow -- down from a 10.8 multiple in July, but up from 7.8 in July
But as John Kornreich, a conference attendee from Sandler
Capital Management, observed, it's often a bad sign when "expert" opinion
is so unanimously bullish. Kornreich added, though, that he is also a bull, with lots of
money invested in cable.
On the new-revenue front, Tow spoke of the potential for
maintaining strong profit margins through telephony, rather than through video, since
sports and general-entertainment programmers keep jacking up costs. Basic-cable margins
also could shrink as operators are forced to spend more on marketing and customer service.
Insight Communications CEO Michael Willner laid out a case
for operators' doubling cash flow over a five-year period, assuming new revenues and
continued 2 percent subscriber gains.
Martin said her thesis was that cable operators can't
fully exploit the potential of the broadband distribution platform because they don't
have the branding and marketing power to drive penetration as deeply as a
consumer-products company could.
AT&T, for example, can afford to pay above-market
prices for cable because it has a better chance of delivering on Internet-based telephony
than TCI could on its own, she said. And even if that telephony strategy proves to be
wrong, AT&T could lease or sell capacity to Microsoft for home data services.
"When we look at the numbers, these stocks all look
like they're doubles," she said. "And we think that they're all gone
in three years."
Cable's strength had made it possible to raise capital
through the sale of high-yield securities at attractive terms. Avalon Cable chairman David
Unger said MSOs had made about 12 high-yield deals over the past year, paying interest
rates of 10 percent to 12 percent and leverage of up to eight times cash flow.
"That market is kind of gone right now," Unger
said, after the recent stock-market gyrations. Avalon, in fact, is assembling bank loans
for its $435 million purchase of Cable Michigan Inc. -- a financing chore that might have
been accomplished with high-yield sales.
"When the debt markets come back, there will be
opportunities to buy properties," Unger added.
High-yield market experts on another Kagan panel were
confident that MSOs -- especially bigger, lightly leveraged operators -- would be able to
sell junk bonds relatively soon after the volatile capital markets settle.
"From an investment standpoint, the cable sector has
done well," Morgan Stanley Dean Witter vice president John Abbot said. He and other
banker panelists said cable's strengths -- steady cash flow and domestic customer
bases -- are what investors are seeking now.
When prices soar, some buyers shy away.
Rocco Commisso, chairman and CEO of MediaCom LLC, said
during one panel talk, "I believe that the $3,700 to $3,800 price [per subscriber] is
here to stay," citing the price that Allen agreed to pay for Charter Communications
Commisso amassed 365,000 subscribers at an average of about
$1,200 apiece, he has said, though he did say at the Kagan conference that he was
"probably" a buyer at $2,000 per subscriber.
However, Goldman Sachs & Co. sold its 36 percent stake
in Marcus Cable Co. L.P. to Allen, and it has agreed to sell its stake in the United
Kingdom's Diamond Cable to NTL Cable.
"We are no longer in cable," Goldman senior
managing director Mitch Scherzer said.
"Institutionally, we have a bullish, optimistic
perspective of cable as a survivor and a competitor," he said. But at current prices,
it's hard to get the kind of returns that financial investors have come to expect in
There are probably investment opportunities, though, in
nonurban systems that aren't in demand by Allen and other aggressive acquirers,
Monica Hogan and Mike Farrell contributed to this report.