Tough times for cable TV stocks

March 07, 1994|By New York Times News Service

The last few weeks have not been happy ones for cable television companies.

Not only did the Federal Communications Commission announce that cable rates were being rolled back by 7 percent, but the huge $33 billion merger between the Bell Atlantic Corporation and Tele-Communications Inc. fizzled.

Those two events, for the next few years at least, will transform what had been a dynamic growth- and investment-oriented businessinto a more defensive, cautious industry.

For investors, the change means that cable shares should not be bought for their own intrinsic potential, but based on how highly their assets are valued by a potential buyer. And the price those assets will probably fetch is a good bit lower than it was only a week ago.

"The only reason to be investing in the cable business at this juncture is as a takeover play," said Christopher P. Dixon, a cable analyst for Paine Webber Group. "No one knows what the cash flow prospects forthese companies will be over the next two to three years. In a week, we have gone from a seller's to a buyer's market."

Frederick Moran, a vice president of Salomon Brothers, said cable companies in big, attractive markets are likely takeover targets. Cablevision, which operates in the New York metropolitan area, and Adelphia, which has operations in the Northeast and Florida, fall into this category, he said.

According to estimates from Salomon Brothers, the FCC's rate rollback will deprive the industry of as much as $3 billion in revenue, and $15 billion in lost borrowing power.

Much of the debt and cash flow shortfalls would have been used to finance the capital spending that analysts say is crucial to turn telephones, computers and cable into the information superhighway.

"The industry will have trouble generating enough free cash flow find the necessary funds to build the superhighway," Mr. Moran said. "That will delay its construction, perhaps as much as five years."

But skeptics said they wondered whether the highway, even if it did get built, would generate the demand necessary to justify the billions of dollars needed to create it.

Stephen Roach, a senior economist at Morgan Stanley, said tha last year Americans spent about $160 billion on all forms of multimedia, from televisions and personal computers to video cassettes and movies.

That was more than double the level of a decade ago, and about equal to what was spent on cars and trucks. With real disposable income growing at a snail's pace, Mr. Roach said he was not sure if the benefits of the superhighway would be sufficient to entice consumers to spend even more.

Analysts have acknowledged the risk, and said the days when technological advances created their own demand, as they did in the 1980s, were largely gone. "Near term, the picture isn't very good," said Jessica Reif, an analyst at Oppenheimer & Co.

But he recommended two stocks, Tele-Communications and Comcast, which has a hand in the new wireless communications alliance announced last week between Nextel and MCI Communications.

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