Kagan's Column: Cable's Due for Its Own 'Event' Deals

Cable World, Feb 21, 2005

By Paul Kagan

I got a big kick out of Procter & Gamble's Jan. 27 decision to acquire Gillette, and not because I own either stock, because I don't. It's because so many people, since March 2000, have had so little faith in the concept of PMV: Private Market Value--the inherent, private worth of a public company. A year ago, the Dow Jones Average was at 10,610 and Gillette was struggling at $35, still less than its $41 price at the top of the market in 2000. On deal day, the Dow was flat vs. a year ago, while P&G valued Gillette at $50, 43% more than January 2004, causing some widows and orphans to place nasty calls to whatever brokers had earlier sold them out.

Upon hearing that key Gillette owner Warren Buffett will be buying even more P&G stock, one money manager said "it appears [Buffett] might be in P&G for the long haul." No kidding. The world's second-richest man first invested $600 million in Gillette shares in 1989 and made his total position of 99 million shares worth $5.3 billion last month. Not a bad move over 15 years. Buffett's own stock--Berkshire Hathaway, which has never been split--rose over 42 years from his average initial cost of $15 to an all-time high of $95,700 on Feb. 25, 2004. And yet, numerous times in recent years, Buffett has been outspoken about the poor prospects of appreciation for equities. Looks like he buys right, predicts wrong. (I should also add, he sells right. I sold his stock at $67,000, before the move to $95,700. The good news is that I had bought it at $995 and held it for only 18 years.)

Worthy of the weight of its $190 billion value, the merger has tons of significance. The new company reportedly hopes to use its size to occupy a greater share of Wal-Mart's shelves, and no doubt carry more clout on Madison Avenue and around the globe. Regardless of the impact in the trenches, the sheer size of the deal is just, well, normal. In 1988, the RJR takeover set a deal record at $25 billion. Ten years later, the combined equity value of AT&T and TCI was $169 billion. Eighteen months after that, the combined equity value of AOL and Time Warner was $153 billion. P&G-Gillette equals last year's record Cingular-AT&T Wireless event. Who's going to do the first $200 billion deal?

The point of all this is that media companies have not been in the game. Where once they led the deal-making way, the rocky road following the AOL-TW deal, plus an FCC bent on creating competition and limiting ownership, have combined to mask the real Private Market Value of cable systems, TV and radio stations, newspapers, magazines and even satellite companies (the FCC didn't promise a rose garden). In bygone days we could count on periodic "events"--like Gillette's--to refocus investor attention on the gap between public and private worth. One recent exception is Pulitzer, the venerable St. Louis publisher whose stock wallowed in the obscurity of $40 dollars for years before it sold Jan. 31 to Lee Enterprises, an equally low-profile newspaper chain, for $64/share. That price was a robust 31x earnings and 14x cash flow, but some PTZ investors are thinking PMV: Two of them filed class-action suits over the absence of an auction market and an insufficient price!

Back in broadband, I see plenty of events ahead in the logjammed cable deal market, both among operators and their vendors. Given that the FCC and Dept. of Justice have blessed a two-company satellite market and three-company telco field, it isn't a stretch to most of the nation's cable subs owned by just three to five MSOs. As for the equipment sector, I'm amazed that we still have, by 2005 standards, moms-&-pops pitching hardware. But now that Rupert Murdoch has opened the U.S. for his NDS software subsidiary, and Tandberg Television, a Norwegian vendor with a $500 million market cap, has acquired N2 Broadband for $118 million, we're reminded that our weak dollar once again prices acquisitions attractively for companies overseas. Share turnover in Harmonic has been active on prices rising from $6-8 up to $10-$12. Even long-dormant C-COR stock has firmed, bouncing off two sub-$7 bottoms in summer and fall, now that its acquisition of nCube put nearly 7 million shares in the hands of Oracle's Larry Ellison. Given the growth of high definition, VOD, digital conversion, IP and interactivity, more attention is being directed to the head-end and network.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. He owns shares of Harmonic and C-COR, and, as an early- round investor in the start-up of N2 Broadband, now owns shares of Tandberg TV. Information in his columns is not intended to be a recommendation to buy or sell securities.

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