AT&T Cable Writedowns Spur Sectorwide Selloff - TheStreet

For cable operators, falling subscriber counts are leading to falling stock prices.

AT&T Broadband

, the

AT&T

(T) - Get Report

subsidiary slated to merge with

Comcast

(CMCSK)

, said Tuesday its basic cable service lost many more subscribers than expected in the second quarter. In addition, AT&T took a pretax charge of $16.5 billion to write down the value of its cable operations.

Dogged by those disclosures and other worries, the cable sector suffered a wretched day Tuesday. But following comments from

Charter Communications

(CHTR) - Get Report

CEO Carl Vogel about remarkably low stock prices at his company, cable shares staged a mild recovery Tuesday afternoon.

Still, Charter's shares, down as much as 20% for the day, finished down 9%. Other big losers were

Cablevision

(CVC)

, down 17%, and

Cox Communications

(COX)

, Comcast and

Insight Communications

(ICCI)

.

Low Occupancy

AT&T Broadband said that about half of its net loss of 125,000 basic subscribers was due to low occupancy rates in apartment buildings the company serves and higher-than-expected seasonal losses -- primarily among college students finishing their school year and people with vacation homes in the South heading back north at winter's end.

The other half stemmed from competition from satellite, according to AT&T Broadband CEO Bill Schleyer, as well as from people giving up on multichannel video altogether. Because most of the competitive losses came from areas in which the operator hasn't upgraded its network to enable features such as telephony and high-speed data service, Schleyer told analysts on a Tuesday conference call, the company is trying to speed up those upgrades as much as possible. Schleyer told analysts, "We are moving forward on this priority with the appropriate urgency."

Schleyer said the company expected the basic sub loss count to be lower in the third quarter, though he declined to give guidance for the full year. "The fourth quarter has traditionally been our strongest quarter, and we see no reason why that won't continue," Schleyer said.

Boomer Sooner

A

shrinkage in basic cable subscriber counts, while expected industrywide later this decade, may be showing up sooner than expected and places further pressure on cable operators to generate cash from advanced services. Discussing the basic loss at Charter's annual meeting Tuesday, Vogel said investors should be focusing on other yardsticks of financial and operational performance: "Our real metrics are revenue, free cash flow and liquidity."

AT&T's cable writedown, meanwhile, largely reflects the drubbing cable stocks have taking in the market this past year, both before and after revelations of alleged financial chicanery started flowing out of

Adelphia Communications

(ADELQ)

in late March. Of the $13.1 billion of the after-tax writedown, $11.8 billion, or 90%, reflected AT&T's reassessment of the value of the goodwill and franchises associated with its own cable operations, as opposed to investments in other operators such as Adelphia.

The reassessment was prompted by significant changes in the general business climate, said AT&T Chief Financial Officer Chuck Noski, "evidenced by severe volatility in the stock market, including a fall in the value of publicly traded cable industry stocks and corporate bankruptcies."

The value at which AT&T had originally valued its cable operations wasn'timmediately clear, making it difficult to see the percentage drop in thecompany's assessment of the property. On the conference call, Goldman Sachs analyst Richard Greenfield asked what the original valuation was for the relevant operations, but Noski didn't address the issue.

Last July, when its stock price was higher, Comcast offered $58 billion in stock and debt assumption for AT&T's core cable system operations. AT&T originally paid $97 billion for its cable TV business, though that price included what has since been spun off as

Liberty Media

(L) - Get Report

, as well as AT&T's stake in

AOL Time Warner's

(AOL)

Time Warner Entertainment.

Responding to questions about Charter's stock price at the company's annual meeting, Vogel said that the company's cash-flow multiple and implied per-subscriber value appeared low. "We are all extremely disappointed in our stock price," he said.

Though public market prices are low all over the cable industry, Charter won't be a buyer in the near future, said Vogel. Not only does the company not have the financial capacity to make a major purchase, he said, but also at current prices no one else in the industry wants to be a seller.