It's no secret that cable stocks — down more than 40 percent this year — haven't been helped by the problems and uncertainty surrounding Adelphia Communications Corp.
At an industry conference in New York last week, the heads of three top MSOs let out some of their frustrations, lamenting how their shares have declined despite reporting strong operating results.
"I can't help but share everyone's sense of depression about how the public markets are treating especially good performance," Cox Communications Inc. president Jim Robbins said at the Deutsche Bank Media 2002 Conference. "Truly, this is a great time to be in this business.
"The industry as a whole delivered very strong results so far this year and our own first quarter results were the best that our company has ever seen. However, we've definitely seen better times on Wall Street. It's no secret that this is highly, highly frustrating to me."
Cox, which has historically been the crown jewel of cable stocks, has dropped more than 24 percent since the beginning of the year. The stock closed at $31.83 on June 5, down 57 cents.
OPEN TO DEALING
Robbins came the closest to naming Adelphia as one of the culprits of the decrease in Cox's shares, citing industry pundits who've blamed the stock's decline "on the mistakes of other cable operators. We obviously agree."
He also appeared to be open to doing a deal to purchase Adelphia assets — particularly the MSO's Desert Hot Springs, Calif., system, located near Cox's San Diego cluster. But although Cox continues to look at opportunities, Robbins said, it is unlikely that he would be able to reach a deal with Adelphia.
"There is only a very small piece right next to our San Diego system that makes sense, and we were overbid by Adelphia two years ago when they bought that," Robbins said. "We continue to look at those properties to see if they make sense.
"If they find the right thing that we can make into a big cluster, we can do stuff with that. But I don't know anything about the assets at this point."
Robbins added that the current Adelphia situation casts a pall over the cable industry.
"It is just so, so sad for John Rigas in particular, but it is a terrible thing for the industry," Robbins said. "I hope it gets cleaned up and goes away as quickly as possible.
"Unfortunately, I can see a rather long, arduous process [of] working through all of those issues. It looks like those assets will be encumbered for a long period of time until things get worked out."
Comcast Corp. president Brian Roberts — already busy with his MSO's pending merger with AT&T Broadband — said Comcast's plate is full, so it's not likely to look to acquire any of Adelphia's assets. But Roberts left the door open to other deals.
"There are opportunities to trade systems, to figure out partnerships and turn them into cable systems we can manage," Roberts said.
For the immediate future, Roberts said, the focus will be on getting the Broadband deal done and on raising Broadband's cash-flow margins (cash flow as a percentage of revenue) to Comcast-like levels.
AT&T Broadband's cash-flow margins — currently at about 25 percent — are among the lowest in the industry. Comcast, on the other hand, has margins in the low 40 percent range.
Boosting those margins won't be that difficult, Roberts said. He once again noted that Comcast has done it before, with about 1.4 million former Broadband subscribers that the Philadelphia-based MSO purchased in 2001.
In one year, Roberts said, Comcast was able to improve the margins on those systems by about 6 percentage points.
"We're going to do this in small, bite-sized chunks," Roberts said. "We will break them down into smaller units, eliminate duplication. We have literally tens of hundreds of people who are running cable systems."
If Comcast manages just to improve the Broadband systems margins from 25 percent to 35 percent over the next three years, that would translate into a 20 percent cash flow growth rate for the next three consecutive years, Roberts added.
Charter Communications Inc. president Carl Vogel also was frustrated over the precipitous decline in his stock, which is down about 72 percent year-to-date.
"We're extremely frustrated with the value of our stock," Vogel said.
Although Charter was rumored to be in talks with Adelphia concerning systems sales — chairman Paul Allen was thought to be trying to hammer out a deal to buy Adelphia's Los Angeles systems before talks broke down late last month — Vogel said the MSO would stay away from any deals that increase its leverage.