The Cable Guys
from www.barrons.com page 39 of 12/29/97 paper edition
Hopefully CUBE's business will grow with cable
By Leslie P. Norton
What next-hostile takeovers in the cable industry? Not if you believe the obvious intent of an unusual joint press release last week from Tele-Communications Inc. president Leo Hindery and Comcast chieftain Brian Roberts. "As the presidents of two of the leading companies in the cable-television industry," they proclaimed, "we have always worked in a spirit of cooperation and ... will continue to do so into the future." The two remain in "active discussions on prospective transactions."
The pair made the statement last week after the New York Post alleged that Comcast's Roberts and Bill Gates of Microsoft (which owns 11% of Comcast), tried to get control of a 20%-plus voting block of TCI, which came up for grabs after the death of TCI founder Bob Magness. According to the Post, Roberts' attempts to get his hands on the voting block with Gates' financial help so enraged TCI Chairman John Malone that Malone "killed a deal to swap cable systems with Comcast." (Control of the share block is also contested by Magness's sons.)
Many cable players, it should be noted, fret that Microsoft will dominate cable technology for the Internet, as in all other things. In a recent Advertising Age interview, Malone said, "What angered me ... was the backdoor nature of the attempt ... If Bill's interested in our company, he should come in the front door."
It seems inconceivable, of course, that Comcast wants to make Malone mad. But the prospect of hostile takeovers is just another reason people are sitting up and paying attention to cable stocks. Cable issues were the worst-performing group in the S&P in '96 after some lean years that saw the collapse of a planned merger between Bell Atlantic and TCI, and worries about higher cable rates. But cable roared in '97, and that's revived the fortunes of a host of mutual funds that bet big on cable stocks, including $560 million Gabelli Value (up 44% this year), $340 million Weitz Value (34.4%), $6.6 billion Oakmark Fund (28.9%), and sibling offerings.
Why such a reversal? A year ago, people predicted cable subscribers would decrease amid increased competition from satellite companies and the Baby Bells. That hasn't transpired. Satellite growth has fallen short of expectations, because strong initial demand from sports fans failed to carry over to cable subscribers who learned that satellite was no bargain compared to cable. Now there's the promise of digital cable, with more channels, interactivity, and sharper transmissions. Bill Gates's investment in Comcast last summer was a strong endorsement of the cable platform. And other savvy investors are venturing back into cable, including Texas financier Robert Bass and the Blackstone Group.
How much juice is left in the rally? Ask Bill Nygren, who runs top-performing $515 million Oakmark Select, which is up 49% this year and has a quarter of its assets tied up in TCI tracking stock Liberty Media, US West Media, and Cablevision Systems. Nygren allows that buying TCI at these levels "is not an easy decision. For the industry to go up from here, it has to demonstrate significant growth in incremental services, that it can really bring on a large number of Internet subscribers, or team up with telephone providers to provide Internet telephony. The rebound from being tremendously out of favor is done. From here, you need to be selective in playing the names still catching up in performance."
Still, Nygren remains a fan of Cablevision, which he believes will see ever greater numbers of subscribers sign up for new services, and which has reduced debt as a percentage of assets.
Similarly, Wally Weitz of Weitz Value has 25% of the fund and its sister portfolio, Weitz Value Partners, sewn up in cable stocks, including Century Communications, Comcast, US West, and Liberty Media. Weitz stuck to his guns for the past couple of years, reasoning that cable stocks would ultimately rise because "the basic business was good, and each company was generating good cash flows." Eventually, he was right. But these days, Weitz has pared his cable holdings because they've risen so much. He's letting cash, now at 20% of assets, pile up, and moving into controversial mortgage REITs like Redwood Trust.
What's next for TCI, which accounted for more than 4% of assets at mid-year? "In any other industry," Weitz remarks, "hostile takeovers would be good, and if someone were temporarily willing to overpay for something, that would be wonderful." But a hostile takeover of TCI? "Malone is so central to almost everything in the cable industry that it's hard to imagine. And if there were some sort of feud, it could slow the rollout of digital boxes and joint efforts' investors need to see to keep pumping up cable stocks.
Weitz does believe there's room to rise yet for the cable issues. But, he hastens to add, he's not buying: "I'm not anxious to get out, because I don't have anything to replace 25% of my portfolio, and these are still growers." |
