Look for Signs of Growth At the Anaheim Show

Cable World, Dec 2, 2002

Byline: PAUL KAGAN

Just a few short months ago, in the teeth of the corporate governance storm, the venerable Western Cable Show was said to be on the rocks. It didn't happen, including a makeover to something called BroadbandPlus, which has become just the title of this year's edition. The show is hot again, with a new buzz around this week's event in Anaheim. Though much fewer than their gargantuan size at the bull market peak, energized delegates will include not only the usual operators and techies but a group just coming out of hibernation: the financial community.

The Western has always benefited from a December date in warm weather and from its position just before the start of a new year and 6-7 months ahead of the next national convention. Every new technology development in the last three decades has been sneaked, peeked or tweaked at the California Cable Assn. gathering. I expect more of the same this week.

Back in August, after the infamous, public Adelphia handcuffing and amid fears about Cablevision's finances, the word was that MSOs needed to cut back on advanced service rollouts. It was the flavor of the month (see my Aug. 5 column), but it's almost impossible for spectrum-rich cable to put a lid on the ingredients in its broadband pot.

In Anaheim, convention booths (especially CableLabs' high-tech annex) will be touting digital boxes, VOD, high-speed data, telephony, home networks, HDTV and ITV. There's plenty of skepticism about all of these, but the industry is well into the developmental path that eventually brings new offerings up to critical mass.

At the show, look for signs of growth because cable MSO stocks have certainly been discounting some. From their respective lows of July, August & October, nine public MSOs rose an average 122% to their November high. Compare that with the Dow Jones Average's 20% gain. As usual, over-selling of the industry's most leveraged players led to the spurt: Cablevision soared 293% from $4.67 to $18.35; Mediacom 191% from $3.38 to $9.85, General Comm. 144% from $2.60 to $6.35 and Insight 105% from $6.43 to $13.20.

Bears on cable still cite declining basic subs and maturing advanced video business. But that's the story that got us down to July 24, August 14 and October 10. Three's a charm. The Nov. 18 completion of Comcast's acquisition of AT&T Broadband may well be remembered as the day cable woke up from a bad dream. (Though the "merger" was supposed to be called AT&T Comcast, Ma Bell's name has been dropped. No one wonders why.)

There's even hope for cable's most dish-vulnerable operators, in the boondocks. But only if they sell out at multiples of 4-6x cash flow and $500-800/sub to some of the tons of equity money sitting on the sidelines. The Quick Take technology from HITS and Motorola, giving a rural operator 150 channels for a $30K head-end investment, is attracting financial buyers. That could get them off the endangered species list. Ex-Helicon Cable executive Peter Hopper, now with DH Capital, says "rural systems, bought at the right price and with capital for upgrades, can be attractive investments." But he also notes that "the gap between small system and large system multiples is greater than ever."

Analyst Paul Kagan is an active investor and money manager and often owns securities mentioned in his columns. He owns shares in each of the cable MSOs mentioned above. He may buy or sell before and after his columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction. Kagan is vice-chairman of Primedia Ventures, an affiliate of the owner of Cable World.