The good news in the unwinding of Time Warner Entertainment (TWE) is that it dissipates the big, black financial cloud hanging over AOL Time Warner and Comcast. The bad news for them and every other MSO is that the deal values Time Warner Cable systems at the low, low price of around $3,100 per sub, confirming investors' skepticism about the private-market valuation of cable systems.
As part of the deal to give up AT&T Broadband's 27% stake in TWE after Comcast's takeover, AOL Time Warner will cut Comcast in on a new partnership containing only cable systems.
Comcast will own 21% of the new Time Warner Cable; AOL will own 79% and run the venture. Ultimately, the companies plan to take part of Time Warner Cable public and allow Comcast to sell or otherwise "monetize" its position.
That makes the deal the first in months to indicate how high-quality properties are valued in the private market.
Cable stocks have been trashed in recent months as investors fear a spread of the Adelphia accounting flu and other operators' high leverage. But there has been little indication of how private investors are valuing properties underlying the stocks.
AOL and Comcast executives reportedly value the Time Warner Cable properties at around $31.5 billion. That's about 10.5 times estimated running-rate cash flow and just shy of $3,100 for each of the venturer's 10.3 million subs (omitting systems being taken over by Advance Newhouse and adjusting for systems in joint ventures).
That's far from the $5,000 per sub and 20-23 times cash flow commonly fetched two years ago. Prices peaked with a $6,200 per sub paid in one California deal by, of course, Adelphia's Rigas family.
UBS Warburg said the TWE deal is about what cable operators were seeing in the mid 1990s.
Other deals carry just as much bad news. Charter Communications' planned system sale is fizzling. The MSO hoped to raise $1.8 billion by selling systems of 600,000 small-town subs, but bids reportedly came in at $2,200-$2,600 per sub.
Add to that AT&T Broadband's deal to sell rural systems for $2,700 per sub to Bresnan Communications, and the market is pretty dim. Time Warner Cable comprises mostly strong, fully rebuilt properties in tight clusters, including New York City.
Analysts say cable stocks are trading for $2,700 or so per sub, with battered Cablevision at $1,800 and Cox around $3,000.
Some industry executives say it's unfair to use the TWE deal for comparison. "Very little of the deal is in cash," said the CEO of another cable operator. "It's mostly a paper transaction; if the securities go up, what Comcast is getting will be much, much different."