Exactly how much is the future worth in dollars and cents?
That’s the question raised not only by the recent $48 billion AT&T Corp. deal to buy the Tele-Communications Inc. cable company, but by hefty prices investors are paying for many stocks of cable, telecommunications, software and computer firms these days.
Such investments, with their anchors hooked into the future, typically cost a lot because they’re based on hopes and dreams of a better technological place. They’re also often as unpredictable as a quick cruise to Gilligan’s Island on the Minnow, with passengers basking in the sunlight one moment and washing up on the shore the next.
Even cable and telecommunications experts offer up varying degrees of confidence about what the huge AT&T-TCI deal means to the average investor. It’s designed to provide consumers with local, long-distance and wireless services, as well as cable television and dialup Internet access.
Some say it’s a bellwether deal. “You can easily justify prices being paid for the cable stocks even now, for a strategic buyer could come in and pay a lot more for them and still make it all work,” said Doug Shapiro, cable analyst with Deutsche Bank Securities. “You’d need to have someone come in to combine operations with their own, building synergies and providing higher penetration of the bundled services.”
The AT&T-TCI deal makes a lot of sense, Shapiro contends, and he expects similar deals to take place. Because cable companies tend to perform as a group, he favors a market-basket approach rather than making a bet on any single stock.
“This is the seminal deal in media and communications for the last decade, with implications for virtually every company in media, entertainment, communications and information,” declared Gerard Klauer Mattison cable analyst Alan Gould, who’s convinced that cable is the best pipeline into the home. “Within two years, it will accelerate the roll-out of telephony, high-speed data and digital video, with a dramatic impact on the choices available to virtually every consumer.”
He expects Cablevision Systems to be the next to align with a telephone company, because TCI owns 36 percent of the company’s equity and because it has a strategic presence with the bulk of its 3.4 million subscribers in the New York area. Comcast, he believes, may be the least likely to combine with someone because the Roberts family, which has majority ownership, doesn’t appear interested in selling right now. The AT&T-TCI deal underscores the long-term shrewdness of Microsoft’s $1 billion investment in Comcast last year.
“I think the chance is 90 percent that the AT&T-TCI deal closes, and it is the kernel around which you have a nationwide competing network,” added Anna-Maria Kovacs, telecommunications analyst with Janney Montgomery Scott in Philadelphia. “Other telecom companies are going to have to get into the cable business to get themselves national and get themselves a broad array of products.”
The advantage AT&T and the cable companies have is that they won’t face too much in the way of regulatory oversight, she pointed out, while regional phone companies will encounter regulatory barriers to their diversification.
But be careful about extending AT&T’s largesse to all other telecom firms, some analysts warn.
“To justify the premium it’s paying, AT&T is counting on being able to increase penetration in the basic cable business using the AT&T name and cross-selling to existing long-distance customers,” said Anthony Ferrugia, telecommunications analyst with A.G. Edwards & Sons Inc. in St. Louis. “Because AT&T’s incentive and size is greater than anybody else’s, I’d caution against extrapolating these same valuations to other companies and automatically expecting a price of 16 times cash flow on a cable company.”
Synergies through combined advertising budgets and operations are an additional benefit of the AT&T-TCI deal, he noted.
All that said, there are positive–albeit speculative–recommendations among both cable and telecom stocks for investors who are believers in the whole “come together” scenario.
Among cable companies, Comcast, with its 4.4 million subscribers and a control option on Jones Intercable’s 1 million subscribers, is recommended for purchase by Gould, Kovacs and Shapiro.
Media One and Cox Communications are also suggested by Shapiro, while TCI is a Gould pick. Because their stocks are so expensive, Gould has hold ratings on Cox,
U S West Media Group and TCA Cable.
Hold AT&T and sell MCI Communications, Kovacs urges. Among regionals, she’d buy Bell Atlantic and BellSouth; among smaller phone companies, she likes Frontier Corp. She’d also hold regionals SBC and Ameritech. Ferrugia suggests buying shares of Sprint in long distance while holding AT&T, and buying Ameritech and SBC among the regionals.
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Andrew Leckey, a financial anchor on the CNBC Cable Television Network, answers reader questions each Monday in Your Money.
