Don't cry for the cable companies

They'll slog through. It's their shareholders who should be sweating
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Say, how do you manage without high-speed Internet service?

We for instance do pretty well. Sure, it's nice when Internet pages flip quickly, or when we can download without an emergency magazine to alleviate the boredom. But it isn't like electricity or mobile phones or computers. You can do without it.

All of which came to mind last week, as we read the newspaper reports on tough talks between Israel's cable companies and the Communications Ministry and Antitrust Authority about the companies' merger.

What caught our eye was that the phrase "high-speed Internet" never arose.

That's hilarious, given the sturm and drang last year over fast Internet. Everyone, from the cable companies to the Communications Ministry to the Justice Ministry frantically warned of the disaster lurking for an Israel trapped in an uncompetitive market and shackled to sluggish Internet.

The unthinking reader would have thought that fast Internet was the key to the bright future of economic growth, and that without it, Israel's entire business sector would lose its edge and lurch to a silent standstill.

Well, the crisis did come, and it affected not only telecommunications but the entire marketplace. But the delay in bringing fast Internet to the Holy Land had nothing to do with it. Maybe even the contrary: If Israel's communications companies had succumbed to the madness and run amuck investing in it, their condition would probably have been even worse.

Okay. Now what?

Now we know that high-speed surfing isn't the be-all and end-all of business. Meanwhile, the above institutions have fixated on a new target, namely "competition in the domestic telephony sector".

The latest burning issue is for Israel's three cable companies to merge and create a single entity, on their own terms of course. Only such an entity, they say, would have the critical mass needed to raise funds in order to compete with monopolistic state-run phone company Bezeq.

Simply red: Come to our aid
Financing problems? Our cable companies? Yes, that's their central claim in talks with the Communications Ministry and Antitrust Authority. They say they can't raise the money they need on their lonesome.

Glancing at their financial statements shows why. Going by their first-half results, their situation is appalling. Matav Cable Systems Media (Nasdaq:MATV), Tevel, and Golden Channels will be ending 2001 with an aggregate loss of at least NIS 800 million.

Beyond that massive loss, the cable companies also owe huge sums to the banks, something around NIS 4 billion. Sounds like unless the government hastens to their aid, not only will the cable companies be unable to compete with Bezeq - they'll be unable to compete, period.

Whimsical outlays vs. permanent
Well, don't be misled by those shrieking figures. Cable is a fantastic industry. The companies' losses of the last two years are due to soaring spending of three kinds.

One is the whimsical kind based on from decisions by the companies' owners, such as the decision to rout the YES satellite broadcaster, which led to a huge surge in spending on content.

The second is one-time spending such as the huge investment in digital converters.

The third was the permanent kind, specifically meaning that pressure from YES forced the companies to improve their services.

There are grounds to assume that after two-three bad years, we'll see a real improvement in the cable companies' operating profits. Content prices will dive after the cable companies' contracts with studios, dating from the deadly satellite-war days, expire. Investment in digitization will end. Ultimately, income per subscriber will climb as better services take over.

Ear of the beholder
"Don't look at operating profits," the cable companies wail to the watchdogs, "look at the bottom line. Our loans are mountainous and the interest is killing us."

They sing a different tune at the banks, we may assume: "Oh, financing costs isn't the problem," they coo. "The cable business itself is great, and will only get better. There aren't many businesses out there generating that kind of cash flow."

Their high interest costs result from using credit to finance their rapid expansion and digitization, and to fight YES while buying out some of their shareholders.

"The banking establishment would be happy to finance their entry into telephony if only the shareholders would use some more equity and less loans," one banker told us. "The banks know that operationally speaking, cable is and will be a great business."

No, the cable companies do not have a financing problem. Even if their shareholders are balking, there are plenty of investors in Israel and elsewhere who'd be happy to enter the companies as partners. It's all a question of price.


No, the real deal behind the cable companies' plaints is that the shareholders not only don't want to provide more money ¿ they don't want to bring in new partners either, to avoid diluting their holdings.

In these tough times, the cable shareholders prefer the banks to assume the risks. They don't want to part with chunks of companies that they believe will be gushing cash geysers in the long run. After all, they're hooked into in a million bank accounts, as subscribers have to pay through standing orders to their banks. No, they don't want to share.

If the companies were less leveraged, the bankers would pony up to finance their entry into telephony. They assume telephony will pay in the long term. It isn't the leverage, it's what it's financing, as tycoon Eliezer Fishman has noted. A good business will find backers.

So don't cry for the cable companies, or lose sleep over their losses and elephantine interest payments. The cable industry isn't about to crumple. It will soldier on, invest, develop, improve service and generate growing cash flows.

No, dear reader, wipe your eyes. It isn't the cable companies who are in dutch, it's their shareholders, which isn't the same thing at all.

The main "threat" the industry faces, so to speak, is that financing costs coupled with souring market and banker sentiment towards telecoms will force them to change their equity structure. Meaning, shareholders will have to shoulder more of the financing burden, and the banks less.