Debt Isn't Only Problem for Cable


Was last Thursday just another day on the calendar, or a harbinger of what's to come for cable stocks that were already badly beaten up?

Angry investors took a buzz saw to MSO stocks, in part because of questions about cable accounting practices — questions raised by Adelphia Communications Corp.'s March 27 revelation of $2.3 billion in off-balance-sheet debt.

For weeks, MSOs were wondering if Adelphia's problems would affect them even further. Last Thursday, they found out that investors have pretty much lumped all cable MSO issues together in the same Adelphia stew.

That's when The Wall Street Journal's "Heard on the Street" column likely contributed to what became a sell-off that went far beyond punishing Adelphia. Five of the nine publicly traded cable companies saw their stocks plummet to new 52-week lows.

Apparently the Journal's headline — "Investors' Faith in Cable Industry Declines" — became a self-fulfilling prophecy.

On that day alone, Adelphia fell 19 percent to close at a scary $8.01. Comcast Corp., Cablevision Systems Corp., AOL Time Warner Inc and AT&T Corp. also fell to 52-week lows.

The Journal
piece questioned whether investors — burned by so many mishaps in the stock market — should look at cable as a safe haven. Clearly, the answer was no.

The piece said investors were giving the highly leveraged cable industry too much credit for cash flow, relative to the capital needed to grow the business. And it reminded readers that Adelphia was not the only operator with off-balance-sheet debt.

Clearly, the piece took a chunk out of the market. But the off-balance-sheet debt problem that it mentioned is not the only concern some of these companies have.

AOL Time Warner seems to be awash in its own investor-confidence problems Countless newspaper reports last week said shareholders have questioned the validity of the numbers the company has posted for the America Online Internet service, as well as its advertising-sales figures.

Apparently moving AOL chieftain Barry Shuler aside — and installing AOL Time Warner COO Bob Pittman to oversee the ISP — did little to assuage investor jitters.

Then there's Cablevision. In a filing with the Securities and Exchange Commission two weeks ago, the Journal
reported, Cablevision said it had $939 million in off-balance-sheet commitments related to set-top box purchases.

And there are other problems out on Long Island. Cablevision still hasn't come to terms with the Yankees Entertainment & Sports Network about carriage of its 130 New York Yankees games in the MSO's 3 million subscriber homes. That inability to cut a deal has hurt the MSOs stock price since April 1, the day of the Bronx Bombers' opening game.

Then there's AT&T Broadband — a case unto itself. Given that MSO's troubled history, analysts don't even use the same benchmarks to measure its performance, acknowledging that its problems are quite unique.

Comcast also took a bath last week, again largely because of the operating cash-flow questions that investors seem to be obsessed with these days.

The question now, in the wake of Adelphia's troubles, is whether the cable sector should be valued based on earnings, rather than cash flow.

We've all seen the domino effect tumble down from the Enron Corp. debacle. Is the cable sector the next to be called on the carpet by angry investors? We shall soon find out.