Two months of bad news from
have scorched the cable industry. Now, Adelphia's efforts to stave off insolvency seem likely to have sectorwide implications as well.
Adelphia shares have plunged more than 80% in the two months since the company let Wall Street in on its dealings with its founding Rigas family. Mounting liabilities and scant disclosures have raised the specter of a bankruptcy filing, forcing the Rigases out of the company they started 50 years ago.
Cash-strapped Adelphia -- which Friday night
revealed a tangled web of finances among the company and the Rigases -- now wants to sell cable systems that account for nearly half its 6 million basic subscribers.
Yet vital as that project is to Adelphia, the sale could easily prove just as important to other cable stocks. With Wall Street souring on the cash-intensive business during this year's tech selloff -- in part, a retreat from Adelphia fallout -- investors are eager to get a read on just how richly the market is willing to value a cable subscriber. A high price could breathe new life into a battered sector, observers say.
"It's a valuation data point," says Nick Moore, portfolio manager at Jurika & Voyles. "It has a lot of bearing for a lot of people who aren't involved in Adelphia and don't plan to be."
The value question is especially pressing this spring because Wall Street has grown skeptical of the industry's promises. Cable operators haven't been shy about borrowing to plow money into infrastructure upgrades and the like, but investors are now tapping their feet waiting for returns. As a result, cable stocks have underperformed the
throughout 2002, with
hit the hardest (after Adelphia, that is).
Adelphia, which in March surprised investors with the news that it had $2.3 billion in potential liabilities not on its balance sheet, hasn't said what offers it has gotten for its systems, nor which of them it may end up selling. But both shorts and longs in cable remain in suspense.
To cable's boosters, a sale could indicate that Wall Street's diminished regard for cable stocks is shortsighted. To the unbelievers, the market could say what sell-siders refuse to acknowledge: that higher programming costs, increased competition from direct-broadcast satellite (DBS) and weak payoffs from upgraded plants warrant a lower value -- and a fundamental change in industry economics.
Past as Prologue
Looking at 13 cable M&A transactions announced since the spring of 1999, Morgan Stanley, J.P. Morgan and Merrill Lynch -- advisers to
for the yet-to-be-consummated
deal -- found that the average and median price paid per subscriber was about $4,500. The highest per-sub price in this survey was $5,378; the lowest was $3,500. Comcast agreed to pay about $4,600 per subscriber in the AT&T pact.
The value of cable industry subscribers as measured by the public market has swung, just like those private market values, in a wide range since mid-1999. The range is slightly lower, though; the average price was about $3,750, as calculated by J.P. Morgan cable analyst Jason Bazinet at the end of last month, and the range was from just under $3,000 at the low end and under $5,000 at the top. As of April's end, the average enterprise value per subscriber, according to J.P. Morgan, was about $3,315.
That said, judging the price of a possible deal isn't simple. Cable systems can vary in terms of customer demographics or infrastructure quality, for example. Moreover, the same system may have different values to different potential buyers, based on whether a buyer already owns nearby systems and could cut expenses by merging adjacent operations. The tax implications of a particular deal also affect its value to a seller.
So there's plenty of room for interpretation no matter what happens. Of course, there's also a more uplifting take on the speculation.
If Adelphia gets a good price, "it could make the rest of the industry look cheap," Moore points out. On the other hand, if Adelphia gets what looks like a low price, investors might simply perceive the deal as being driven by Adelphia's dire need for cash. Moore, who doesn't have any current investments in the securities of cable operators, sees an upside there, too: "It might make the buyer seem attractive."