Per-Sub Values Lose Primacy

Apr 11, 2005  •  Post A Comment

Amid all the chatter on Wall Street about the buying and selling of cable companies, one thing has been conspicuously absent from the discussions: the mention of per-subscriber values when putting price tags on cable systems.

Once the benchmark measurement for which cable companies and cable systems were appraised, per-sub values are becoming less relevant as a valuation tool, analysts say, with the focus now on using more common financial measures such as cash flow and price/earnings ratios to value cable systems.

That’s why per-sub values aren’t being mentioned when market players talk about Adelphia Communications, the bankrupt cable operator that is currently at the center of a three-way bidding war. In addition, as Wall Street continues to bet that Cablevision Systems will be sold in the coming months, few analysts are even discussing the value of the company’s subscribers.

The scenario is a far cry from as recently as three years ago, when Comcast Corp. acquired cable systems from AT&T Broadband for a hefty $4,500 per subscriber. But since then, the cable game has changed.

Analysts note that cable companies, after years of racking up huge losses associated with their plant upgrades, are evolving into regular companies, with cash flow-and in some cases, earnings.

All Subscribers Not Alike

In addition, a cable subscriber is not what it used to be. Most cable companies in the United States are moving beyond simply providing video services by introducing high-margin services such as high-speed Internet and telephony. What’s more, a growing number of cable customers are getting only one service from their cable provider-and it isn’t video. A number of cable companies report more subscribers are signing up just for Internet service or telephone service.

Even within the video realm a delineation is being drawn among subscribers, as those who simply get basic video service are seen differently from more high-end customers who subscribe to services such as digital cable and high-definition television.

Alan Bezoza, a cable analyst at Friedman Billings Ramsey, illustrates the point by using Cox Communications as an example.

“All subs used to be alike, but now 10 percent of their voice subs are voice-only,” he said. “You can’t compare the customer base when some take data only.”

If that wasn’t enough, analysts say that a per-sub value of one multiple system operator can no longer be easily compared with the per-sub value of another. Per-subscriber values are generally based on the present value of the cable subscribers an MSO has as well as the cable franchise’s growth potential.

Because most MSO subscriber growth has topped out, the real growth opportunities are in advanced services-and most cable operators in the United States are in various stages of rolling out those services.

As such, it’s difficult to convincingly compare per-sub values of an Adelphia with those of a Cablevision, said Craig Moffett, a cable analyst at Bernstein Research, who noted that Cablevision is further along in deploying advanced services than is Adelphia.