Good for Cox...
...Bad for the industry and shareholders
By John M. Higgins -- Broadcasting & Cable, 10/24/2004 8:00:00 PM
Most cable executives are deal junkies, so they're generally happy about the Cox family's move to take Cox Communications private. But operators shouldn't be cheering—they should be crying. That's because Cox's deal is bad for the cable industry.
The $8.5 billion deal is bad for Cox shareholders, too. (More on that in a minute.) But the problem for the rest of the cable industry is that Cox is the star pupil, the one that makes the rest of the class look good. Cox has shown investors what's possible for other operators down the road.
But in a private company, Cox President Jim Robbins will curtail the amount of information that gets disclosed, so it will be harder for outsiders to see what other operators might achieve.
Cable operators have lagged Cox in all sorts of big and small areas. Cable execs talk a lot about getting very aggressive in the telephone business, for instance. Cablevision now offers it in 100% of its systems, and Time Warner is close behind.
But Cox has been snatching customers away from Baby Bells for years, pioneering the way with an older, more expensive phone technology. With a million phone customers, Cox's total revenue and cash flow per subscriber are about 10% higher than they would be if they had waited as long as other operators.
Cox started aggressively upgrading systems with optical fiber in the mid-1990s, years ahead of some cable peers. Upgrades were absolutely necessary to offer new services such as high-speed Internet service and VOD. But Cox executives also knew fiber would make their systems more reliable and, hence, keep their customers happier.
The company also spent on customer service when other operators were too cheap to answer their phones. That was well before DBS was a major threat. Staffing telephone centers more heavily and paying up for marketing hurt operating margins for years. But it also means Cox's customers are harder for DirecTV and EchoStar to take away. Other cable operators have been bleeding customers to the competition, sending nationwide DBS penetration up to 20%. In Cox markets, DBS penetration is closer to 8%.
Wall Street sees that and recognizes that stronger operators like Time Warner, Comcast, Insight and Cablevision could catch up. (Unfortunately, the problems at ailing Charter and Adelphia are too big to warrant them the same consideration.)
But in a couple of months, that performance won't be as easy to see. Within minutes of announcing its Cox Enterprises agreement, the cable division canceled an Oct. 27 conference call to discuss earnings with investors. Sure, the press release will come out, but the company won't take any questions. The cone of silence starts to descend.
Cox CFO Jimmy Hayes is absolutely gleeful about how much easier his life will be at a private company. As the guy in charge of working with Wall Street, his life is filled with panicky investors obsessing over every 2% or 3% dip in the stock price. (I typically don't call a company unless a stock moves up or down 10%).
But as a private company, Hayes' staff will no longer be flooded with calls when investors panic over some other cable operator's hiccups. And he won't have to flit around showing the same PowerPoint slides over and over at so many investor conferences.
Cox staffers have been deliberating for weeks over how much information to continue disclosing. Cox will still have public bonds outstanding, so the company still has to file lots of financial data with the SEC. But there are lots of operating statistics, such as growth in high-speed data or the average revenue per telephone customer, that it will no longer have to share.
Before Cox goes quietly into the night, the company is going to have to justify the sale price. A committee of independent Cox directors negotiated a deal last week to sell to the mother ship for $34.75 per share. Cox Enterprises notes the price is a fat 26% premium over the price the day before the takeover offer was first disclosed, Aug. 2.
That premium isn't nearly as impressive when you consider the $33 a share Cox traded for on April 30, just three months earlier. At the time, Bear Stearns' Ray Katz and Morgan Stanley's Richard Bilotti both pegged Cox's true value at $41; UBS' Aryeh Bourkoff thought it was worth $39.
I wonder if anyone at Cox – or Cox Enterprises—complained at the time that those targets were just way, way too high.
A takeover—especially by a company so closely related to the target—is supposed to be fair. I'm waiting for more details on why Cox seems to think that this one is.
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