Bad management, over-staffing, an extravagant subsidy policy, expensive content acquisition agreements, huge purchases on bank credit and the capital market crash all led cable television monopoly Tevel, controlled by IDB Holdings (TASE: IDBH ), to the verge of bankruptcy. Two weeks ago the company asked the court for protection from creditors.
It is perfectly clear to all the banks' experts that Tevel, like the rest of the cable TV companies, is after all an excellent business that, in the long term, will yield healthy operating profits. The company¿s only problem is the huge debt it has racked up in the five years of the telecommunications boom, during which time it seemed its managers were completely detached from the market, growth and launching new products were primary goals and profitability was secondary.
And now the big question in the business sector is who will pay the price for the mistakes? Who will take responsibility and carry the burden of rehabilitating the company?
The managers? Of course not ¿ they know how to take fat bonuses in the boom days and blame regulations in the bust days. When cable television was a license to print money they told us it was all the result of their genius ¿ they saw the writing on the wall, took chances, and to the victors the spoils.
Now, when everything has gone wrong, they don't see their part, blaming the Justice Ministry for mot approving their broadband Internet and telephony licenses in time. The accusations is ridiculous: if the cable companies had received such licenses, they would have poured hundreds of millions of dollars into that area as well, and today their debts would be even higher.
A good example is United Pan-European Communications (Nasdaq:UPCOY, ASE:UPC), which owns 48% of Tevel. As opposed to Tevel, UPC got approval from European regulators for fast Internet, telephony and the acquisition of competitors. The result was $10 billion in debt that crushed the company. UPC is not alone. A long line of communications companies received regulatory approval to rush ahead, investing tens and hundreds of billions of dollars with no logical business plan, simply expecting that it would be possible to roll everything over into a Wall Street offering.
So maybe now the shareholders will reach into their pockets and inject money? Not easily. In recent years, Israeli banks have accustomed the cable industry and many other Israeli entrepreneurs to the method where the banks bankroll everything at low interest rates, taking most of the risk in the event of failure. In case of success, the profits stay with shareholders.
Shareholders plan: Public carries burden
The cable companies shareholders therefore have a revolutionary recovery plan in which the public will carry the burden: in the first stage, the public will pay through higher prices for service and the companies have already broached the subject with the Minister of Communications and asked that he instruct the Cable Broadcast Council to approve a price hike for the base package. In the second stage, the public will pay when the banks, most of whose shares are publicly held, write off and forgive and refinance cable companies' debts.
No, no thank you. This is the time to thank the cable company managers for their excellent ideas and draft a recovery plan in which the carrier of the burden is none other than those who took the risks and managed the companies ¿ the shareholders.
The cable companies' recovery plan should be comprised of three parts:
The first part is where the shareholders inject capital into the cable companies in order to participate in the recovery efforts. If they are uninterested or unable to inject money, then they should find investors who will do so, diluting their own holdings. At the right place, investors will be found willing to invest tens of millions of dollars into the companies for a significant bite into the cable sector.
The second part is raising funds from the public through convertible bonds. The need to raise funds from the public stems from the banking sector¿s massive exposure to the cable TV industry. The banks are not interested in increasing that exposure, so the appropriate thing to do is send the companies to the market floor.
The bonds the cable companies issue must be attractive enough that institutional investors, who manage our money and are predominantly controlled by the banks, can justify their acquisitions. In order to be attractive, the companies must offer effective interest of 2-3% above the government's interest. The bonds must be convertible at a low company value. Not a $2000 per subscriber and not at $1000.
The third part is changing the companies' cost structure: internal restructuring and approaching international content providers in order to lower the cost of contracts.
That kind of a recovery plan will allow the cable companies to finance the losses expected in the next two years, to reach profitability and the service their loans in the future.
Tevel's request for court protection from creditors and cessation of payments to suppliers threw the entire television industry into chaos. This is exactly the stage where, behind a thick smokescreen, the industry, aided by the ever-attentive Minister of Communications, will try to roll its losses over onto the public.
"The shareholders think they will now tax the public by raising subscription prices and writing off debt," a CEO of one of the banks involved in the recovery plan explained. And, this is the moment to remind the cable television industry of the rules of engagement in the "free market" they so revere.