The lift cable stocks received last week following the announcement that Cox Communications’ majority shareholder was taking the cable operator private proved to be short-lived. Wall Street’s enthusiasm for the sector waned by week’s end and investors remembered once again why they are cool to the sector.
Following the announcement last Monday that Cox majority shareholder Cox Enterprises planned to pay $7.9 billion for the 38 percent of the multiple system operator that it doesn’t already own, shares of several cable operators surged on the belief that Cox Enterprises’ enthusiasm for cable means the sector as a whole has brighter days ahead or that other MSOs might follow Cox’s lead.
Shares in Comcast rose 5 percent following the Cox news but quickly backed off in the ensuing trading sessions. Cablevision Systems, which has long been the subject of takeover chatter, saw its shares surge 11 percent after the Cox announcement before giving back more than half of its stock-price gains. Meanwhile, Cox shares skyrocketed 20 percent on the news and have largely held on to their gains.
Analysts blamed the backtracking of cable stocks on the challenges that continue to weigh on the sector-namely fierce competition from satellite operators and regional Bell phone companies, both of which have intensified their assaults on the cable industry in recent months.
In addition to heightened competition, Wall Street has penalized MSOs whenever they respond to the competitive threats with price adjustments. Further, investors are demanding that some of the free cash flow being generated by cable systems be returned to them in either stock buybacks or dividends and are abandoning the stocks when their calls are heeded.
Indeed, all of those factors appear to be behind Cox Enterprises’ decision to take the MSO private. Analysts think taking Cox Communications private could signal it is gearing up to be a lot more aggressive in its battle with the phone and satellite companies. By going private, observers said, Cox Enterprises is affirming its commitment to and confidence in cable and wants the freedom to respond head-on to competitive threats without having to fret over Wall Street’s reaction to its decisions and investors’ focus on short-term financial results.
Cox has admitted as much. “An increasingly competitive environment convinces us that future investments in the cable industry are best made through a private company structure,” Cox Enterprises Chairman and CEO James Kennedy said in a statement.
Cox’s move also got people talking about what might be next in the cable sector. After vetting and then dismissing the possibility that another MSO might be taken private, Wall Street players shifted their focus to whether the Cox deal might speed up a sale of Cablevision.
The most obvious contender to step up and buy Cablevision, with its 3 million subscribers located in the New York metropolitan area, is Time Warner, whose cable systems already have a presence in New York. Time Warner has never commented on whether it will pursue Cablevision, though Chairman and CEO Richard Parsons has said he is interested in enlarging Time Warner Cable’s footprint.
The privatization deal also has implications for the sale of Adelphia Communications, the bankrupt cable operator that announced earlier this year it was exploring a possible sale as a way to return value to shareholders. Cox had been considered a suitor for Adelphia, even as Cox Communications CEO Jim Robbins complained about Adelphia’s sale process. With Cox going private, thus limiting its access to the capital markets, most analysts see Cox as no longer a potential buyer of Adelphia. That leaves Time Warner and Comcast as likely candidates to step up with offers for Adelphia.
Cox’s going private might also have implications for John Malone’s Liberty Media, which for years has sought to buy Cox’s 25 percent stake in Discovery Communications. As a public company that might have been going after Adelphia, Liberty was seen as having a chance to snag that stake. However, those chances diminish greatly with Cox going private and thus having no need to sell the stake unless it deems it nonstrategic.