NEW YORK – The “smart money” on Wall Street is moving back into the cable TV sector, both in the stock market and in the market for cable systems. Among the players said to be looking around the market for systems are LBO fund Kohlberg Kravis Roberts and venture capital fund Carlyle Group.
Money managers taking a fresh look at cable stocks say the sector has been oversold over the past year, when stocks like Tele-Communications Inc. fell to historic lows as a result of nervousness about the competitive threat from sat TV and telcos. That has drawn the attention of some value investors, including some of America’s richest men, sources say.
Wall Streeters say confidence in cable has been revived by the recent slowdown in growth of sat TV operators like DirecTV and the moves by telcos to pull back from plans to offer video services. Also TCI, the bellwether stock for the sector, has taken steps to clean up its image with investors, announcing cost-cutting plans and a decision to pull back from telephony in favor of a concentration on video.
Stocks on the upswing
Most cable stocks have come off the bottom, hit in October. TCI, Cox Communications and Comcast Corp. are all up about 30% since that point, although all were down Friday in a down market. But credit agency Standard & Poor’s gave TCI some good news Friday, removing its debt from credit watch and noting that its recent cost-cutting initiatives and strategic changes would help the company meet S&P’s “parameters for a marginal investment-grade rating over 1997.”
All this is good news for most of the battered cable sector, but a mixed blessing for the No. 2 cabler, Time Warner, and its CEO Gerald Levin. Last October – at the worst point in the market for cablers – Levin committed himself to reducing TW’s cable interests as a way to bring down the company’s debt. The change in Wall Street’s sentiment may make it easier for Levin to find a buyer for some systems, and indeed several cablers are looking at some Time Warner systems, including Charter Communications, sources say.
But it may well complicate Levin’s life as well. The core of any cable deal is restructuring Time Warner’s partnership with US West, which owns most of TW Cable, but rising prices may make a deal with US West harder to reach.
And Levin so far has had little luck in reaching a deal with US West, despite his greater flexibility on the structure of a deal. Most observers believe the lack of progress is due to US West, however, which doesn’t want to add too much to its $10 billion in debt and has been prevented from negotiating with Time Warner for much of the past few months by legal restrictions relating to its Continental Cablevision acquisition and a recent $3.5 billion debt offering. Neither company will comment.
A deal with US West is not Time Warner’s only option to reduce cable and its debt, senior Time Warner execs say. Of the 12 million subscribers covered by Time Warner cable, about 2.2 million are in systems owned by Time Warner itself, rather than the TWE partnership. Execs say Time Warner may sell an interest in some of those systems.
But this approach wouldn’t help reduce Time Warner’s debt very quickly. The bulk of Time Warner’s wholly owned systems were acquired just two years ago at steep prices, roughly 11 times cash flow, Wall Street analysts say, and Time Warner likely couldn’t get any more than 8-9 times cash flow now. Industry execs say Time Warner is more likely to sell systems that have been owned for much longer and were bought at much lower prices, but these would likely fetch only a few hundred million dollars.