Gap Widening Between Cable’s `Haves,’ `Have-Nots’

Aug 11, 2003  •  Post A Comment

The troublesome dichotomy threatening to undermine the cable industry’s promise of new services and free cash flow from its $70 billion digital platform became more pronounced with recent revelations of some operators’ widening financial losses and accounting woes.
The emergence of a bifurcated marketplace of “have” and “have-not” players could be the price an industry pays for rapid consolidation and upgrade. It could be the byproduct of closely held family-run businesses, or just plain old poor judgment. It’s more likely all of that and more.
But the latest quarterly earnings calls underscore the threat posed by widespread government probes of some cable company accounting practices to the financial well-being of more than half of the country’s largest operators. The reported numbers and discussion also were stark reminders of how two distinct classes of multiple system operators wrestle differently with the new rules of changing technology and economics.
There is a growing concern on Wall Street about the broad and potentially damaging implications of ongoing investigations by the Securities and Exchange Commission, the Department of Justice and other agencies that already have put billions of dollars of cable-related deals at risk and undermined the credibility of cable companies and executives who must still go about their business. That’s before there is a clear read on punitive actions or fines, or the extent of what could be devastating shareholder liability.
The latest such revelation-of Cablevision Systems’ widening accounting problems-came during the company’s second-quarter earnings call Aug. 5. It has left Wall Street reeling and wondering about the scope and eventual damage that will result from the SEC, U.S. Attorney and FBI probes under way at the Bethpage, N.Y.,-based cable operator. The same concerns prevail at AOL Time Warner, Charter Communications and Adelphia Communications, which also are undergoing similar investigations.
Cablevision’s shares fell 8 percent to $19.27 a share after the company said its auditors, KPMG, could not even sign off on the second-quarter results because of continuing investigation into possible accounting abuses. The company said an investigation being conducted by Wilmer, Cutler & Pickering, a law firm hired by Cablevision’s audit committee, has identified $4.4 million in additional “improperly recognized expenses” at Cablevision’s AMC and WE programming operations at its Rainbow unit for 2000 through 2003. PricewaterhouseCoopers is analyzing the cable networks’ improper expenses, which Cablevision said are too “insignificant” to warrant restating their reported financial results.
Cablevision fired 14 employees of AMC, including its president, in June after an internal investigation uncovered $6.2 million of improper marketing expenses. Soon afterward, the company hired former AOL Time Warner lawyer and Justice Department official Jonathan Schwartz as its new general counsel.
Cablevision Vice Chairman William Bell conceded that if KPMG’s stance or the official probes drag on long enough, those problems could interfere with some company business. “Obviously, if we don’t have comfort at some point in time, we’re going to have to delay financing until we do … but we are actively trying to resolve the situation,” he said.
Analysts say that there should be no impact on the credit or lending covenants of Cablevision’s telecom unit, which is where much of its debt is housed. But Merrill Lynch analyst Jessica Reif Cohen noted, “Cablevision’s ability to restructure its capital structure is restricted if KPMG cannot certify its financial statements.”
While Cablevision’s current woes might not interfere with plans to spin off its fledgling satellite business later this year, they could play havoc with any related financing.
“Any broadening of the issues beyond accounting accruals, any delay in spinning off the satellite, and/or any material delay in filing a 10Q [of official quarterly earnings] would have significant impact on the stock,” said Bernstein Research analyst Craig Moffett.
Charter, which has been struggling to avoid bankruptcy, is trying to execute a complex debt swap in the next week that will ease only a fraction of its overwhelming $19 billion debt load, at least one-third of which the major ratings companies say they want to see paid down immediately. The company, controlled and funded by former Microsoft Corp. founder Paul Allen, has restated its financial results going back to 2000, but has been unable to access capital markets while under investigation for accounting irregularities.
But the most stark reminder of how these probes can interfere with business is AOL Time Warner’s having to indefinitely postpone its planned cable spinoff due to the lack of SEC approvals while the agency investigation continues. The cable spinoff would provide funds to buy out Comcast Corp.’s 21 percent stake in the operations, valued at about $10 billion, and create currency with which Time Warner could acquire more cable systems. The debt-strapped AOL Time Warner is hard-pressed to do either now.
While the identified fraudulent advertising and marketing expenses at AOL total less than half a billion dollars, they represent the pervasive upbeat transactions on which the troubled AOL Time Warner merger was constructed.
Most industry analysts continue to focus on the cable companies’ present financial performance and outlook, while generally characterizing accounting infractions as “disappointing” but “irrelevant” in the bigger financial scheme of things.
Still, there is a growing, nagging concern on Wall Street that the fullest breadth of these accounting indiscretions and probes can somehow impede cable progress and bring down entire companies, one at a time, as has already occurred at Adelphia.
“Cablevision’s strategic vision, led by the Dolan family, is the greatest risk to shareholders,” Fulcrum Global Partners analyst Richard Greenfield wrote last week, referring to the Dolans’ management and voting control, and entrepreneurial whims, which have taken the company into satellite, retail, programming and other noncore businesses.
“If Cablevision is able to maintain its focus on the core cable business, we believe there is significant upside to its valuation,” he said.
In fact, focusing on the core cable business is likely the only way for the industry, its players and its investors to overcome these challenges and serious divides.
Most of the recent quarterly reports from cable operators point to a stabilization, but not growth, in basic cable subscribers; a slowing of digital growth; and new challenges to cable’s booming high-speed endeavors.
The recent indictments of four former Charter employees on wire and mail fraud charges dating to 2000 and 2001 as part of a U.S. Attorney’s probe provided the backdrop for that company’s quarterly report, in which well-regarded Charter CEO Carl Vogel struggled to focus on the advanced set-top boxes that are the broadband gateway to Mr. Allen’s long-promised “wired world.” The mixed outlook prompted Morgan Stanley’s Richard Bilotti to observe, “We fundamentally believe that the value of Charter’s assets exceeds its liabilities.”
With so many Wall Street investors and analysts hamstrung in their assessments of the cable industry and players, the best and only antidote may be what many already are working hard to do-taking a closer, more thoughtful look at operating particulars while keeping an eye on the extraordinary external forces at work and waiting to see which side of the industry’s yawning divide players end up on.