Cable Systems’ Values Decline

Aug 25, 2003  •  Post A Comment

The value of cable TV system operators seemed to be on an unstoppable upward curve from the 1970s into the early 21st century. Now, however, those once upwardly mobile values appear to have hit a wall, with prices declining instead of gaining.
The inability of two debt-laden media giants-AOL Time Warner and Comcast-to consummate any sizable acquisitions right now is a major factor in the downshift.
Moreover, doubts about the future of cable systems in light of fierce competition from satellite services and the slower-than-expected migration to digital cable by consumers have tempered what had been a steady stream of cable system acquisitions over the past 25 years.
“This is because of a paucity of players and deals,” said Paul Kagan and Associates’ Larry Gerbrandt. “Everybody has deal indigestion.”
One large deal, currently stalled, that has been discussed by analysts and the media for years, illustrates the problem. It involves the cable systems in the greater New York City area owned by Cablevision, the sixth-largest multiple system operators. The obvious buyers would appear to be AOL Time Warner, the other dominant player in Big Apple cable, and Comcast, now the largest MSO in the United States.
In an interview with TelevisionWeek (“Premium Is on Access, Selection,” Aug. 18), Cablevision Systems CEO James Dolan acknowledged the difficulty of reaching an agreement to sell his over-3-million-subscriber systems in the New York area, valued at between $13 billion and $18 billion, to the two obvious suitors.
“Time Warner is on its own time line, and we’re on ours,” Mr. Dolan noted, “and I would like to see us further develop our cable systems so we are closer to the top of the value curve than we are now.”
Sources close to Cablevision indicated that Mr. Dolan and his father, chairman Chuck Dolan, place the top of that value curve closer to $6,000 per subscriber, or about $18 billion, arguing that Cablevision’s unique cluster of New York City-area systems warrants a large premium. Mr. Dolan and his associates have asserted that with one of the highest cash flows in the cable system industry, and with one of the most expertly assembled clusters in an extremely important demographic area, it is entitled to a fat premium.
Cable operators, including Mr. Dolan, also point to such future revenue generators as IP Telephony and the current high-profit margin of its cable modem products as indicative of what should be a new valuation for well-clustered systems. (Cablevision Systems, through a spokesperson, Jim Miella, had no immediate comment.)
So far, neither AOL Time Warner nor Comcast are buying Cablevision’s argument. The issue is not only price but also the debt levels these companies are struggling with. At Comcast, spokesperson Tim Fitzpatrick said the company had no comment.
AOL Time Warner is experiencing massive internal upheaval and debate about the future direction of the company, with or without the AOL unit. And some board members and large shareholders are dead-set against AOL’s acquiring any more cable systems, a strategic move associated with discredited former CEO Jerry Levin.
If the company made a major cable system acquisition, such as acquiring Cablevision’s systems, “the stock would fall to $3,” opined Reg Brack, former CEO of the print unit Time Inc. and a leading opponent of any further cable expansion.
Some analysts aren’t so sure about the effect of a Cablevision systems acquisition on AOL stock, currently at a fairly anemic $15. “It depends on what they paid for it,” said Andrew Rittenberry, a cable analyst at Mario Gabelli Asset Management.
Mr. Brack and other large shareholders are concerned about AOL Time Warner’s debt levels, among other things. Mr. Rittenberrry noted that AOL Time Warner currently has a net debt level of about $24 billion and earnings before interest, taxes, depreciation and amortization of approximately $10 billion. Acquiring the Cablevision systems would put the company right back over the horrendous debt levels that current CEO Richard Parsons encountered when he took over a little more than two years ago. That would not be acceptable to many shareholders, private or institutional, who are now leery of media-visionary empire building. Many observers believe that if Mr. Parsons wants to keep his job, he will avoid such big, risky investments in the months leading up to the annual meeting next May.
Another analyst, Russ Solomon of Moody’s Investor Services, agreed that $6,000 per sub is a heady number, but he also opined that “if any company can do it, Cablevision can,” pointing to the “tight clustering,” state-of-the-art-upgrades and high cash flow of the systems, and the perfect fit with AOL Time Warner’s 1.2 million subscribers in the New York area. Mr. Solomon said he still believed AOL Time Warner will find a way to finance a Cablevision acquisition, perhaps through a heady dose of private equity. “I think eventually there will be a deal,” he said. “It makes sense for Time Warner or Comcast to buy the company.”
The downward push on values isn’t fueled only by the lack of big players among current MSOs. In the wake of the failure of several joint ventures and the debacle that AT&T suffered trying to absorb TCI, a lot of potential buyers from outside the cable industry, including telephone companies, have lost interest.
Today phone companies that want video to package with other services are more likely to make sales and distribution deals with existing players than to try to acquire their own wired operations.
“Per-sub market values have been oscillating between $3,000 and $4,000,” said John Hill, a cable analyst with Soundview Technology Partners in Greenwich, Conn. “They hit $4,000 before the second-quarter reports came out, and they have been drifting lower.”
In several large deals in past years, cable systems have sold for over $5,000 per subscriber. Those rich deals usually involved large system groups owned by Gannett and Tele-Communications, among others. According to Kagan analyst Mariam Rondeli, the highest value per subscriber in the industry in 2003 so far was reached in the sale of an RCN system in suburban Carmel, N.Y., to Susquehanna Media, which went for a VPS of $4,027. “That is definitely a high for 2003 deals,” Ms. Rondeli said.
Cable is dealing with two contradictory financial trends. On the one hand, the industry is earning far more per customer than it ever has. But on the other hand, its share of market is decreasing at a somewhat alarming pace, which would have to concern potential buyers of cable systems.
According to a recent report by J.D. Power & Associates, consumers now spend an average of $49.62 a month for cable service, compared with $49.83 for satellite services such as DirecTV. This is the first time the report has shown cable costing more than satellite service.
The cable figure does not include, of course, the added cost of cable modems. For companies such as Cablevision Systems, with almost a quarter of its subscribers also taking the Optimum Online cable modem package at about $50 per home, the average take per customer is almost doubled. The countervailing trend is also clear-fewer and fewer homes are opting for cable.
The J.D. Power study found that 17 percent of U.S. homes now subscribe to satellite services, up from 7 percent in 1998. And households taking cable declined to 60 percent from 68 percent during that same period, a significant decline.