Take That, Wall Street - Broadcasting & Cable

Take That, Wall Street

Seeking freedom from investor whims, undervalued cable company Cox moves to go private
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Fed up with Wall Street valuations, Cox Enterprises plans to take the No. 4 cable operator private in a $8 billion deal that the family-run company hopes will allow more freedom to grow the business.

Cox Enterprises already controls 62% of Cox Communications, the cable company, and is offering investors $32 a share for the remaining chunk as part of a deal that could close this fall.

Many media analysts applaud the move as a unique way to take more control of the company's direction and unshackle it from the fickle tastes of investors. In July, Cox traded at or near its 52-week low of $27, despite growth in new businesses, healthy cash flow and improved second-quarter results.

The bid to buy its remaining cable shares "supports our view that the cable sector has been trading at an unwarranted discount relative to its growth prospects and fundamentals," Merrill Lynch media analyst Jessica Reif Cohen says in a report.

Cox's problems are reflected throughout the cable industry. Shares of the biggest players are trading at frustrating lows, although other indicators—cash flow in particular—appear healthy. Also, mammoth capital expenditures are now behind operators, and the advanced services they promised—telephone, video and high-speed data—are readily available, generating revenue.

But where investors once saw endless opportunity, many see greater risks. Skepticism over cable's strong advantage—offering TV, high-speed data and telephone services over a single wire—is growing as investors become transfixed by cable's bold competitors in these businesses.

In its core business—cable TV—prospects for growth are slim, given that the industry already offers it to 95% of American homes. Meanwhile, direct-broadcast–satellite providers, namely DirecTV and EchoStar Communications, are chipping away at cable's dominance. DBS companies claimed 18% of wired TV homes in July, up from 15.8% a year ago, according to Nielsen figures released by the Television Advertising Bureau, which represents broadcast ad-sales interests. Cable, meanwhile, saw its penetration fall slightly from 66.9% of the market to 67.9%—its lowest point since March 1995.

Explaining the migration, cable operators argue that only low-value basic subscribers are leaving, while high-end customers who buy bundles of services—and pay more per household—are growing.

Meanwhile, cable's rivals are making inroads into its newest businesses: high-speed data and phone services. Verizon, Qwest and Bell South, for example, are partnered with DirecTV in marketing partnerships, and the competition is expected to intensify. And, while Cox generally holds off DBS better than companies like Comcast and Charter—satellite penetration in Cox markets averages just 11%—Cox dropped 54,000 TV subscribers during the second quarter.

In taking such bold action, Cox sends a not-so-subtle message to the cable watchers on Wall Street: We think our own shares are trading at a bargain. Industry analysts, though, expect Cox to have to sweeten its offer by as much as $7 or $8 a share.

Cable executives hope Cox's buyback improves investor confidence and spur growth, as Microsoft's $1 billion investment in Comcast did in 1997. Charter, Mediacom and Insight nosed a bit higher on Cox's news but are still trading below expectations.

Many industry insiders speculate that Charter founder Paul Allen might take that company private. Charter, rocked by an internal financial scandal and executive defections, has tanked in the market, trading around $3 a share. The company would not comment.

While the buyback offers freedom for Cox, it also limits the company's options. By taking on billions in debt for its own stock, for example, it's now an unlikely player in any auction to buy bankrupt Adelphia.

The offer dovetails with Cox's corporate legacy. Controlled by sisters Barbara Cox Anthony and Anne Cox Chambers, the company is known as a very conservative operation, with other private holdings that include newspaper and TV-station divisions; the radio group is publicly held.

Cox Communications went public in 1995. But, says Fulcrum Global Partners analyst Richard Greenfield, Cox Enterprises "has a preference for privately held assets."

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