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Clouds over the deal market

Adelphia Communications set a new record for cable deals last week by bidding up suburban-Washington MSO GS Communications to a new height, approaching $6,000 per subscriber. But the lofty price of about $750 million carried both good and bad news for cable bulls looking for strong private-system sales to boost stock prices: By another measure, the deal represents a significant decline in cable valuations.

The deal breaks the per-sub record set last year when Cox Communications bought another suburban-Washington operation, Media General Cable, for $5,400 per subscriber.

So what's the bad news? The per-subscriber price of a transaction is a quick, common shorthand for gauging a deal, but it's a poor one. Dealmakers really value systems-or any other business, for that matter-on the multiple of cash flow the properties can generate.

And any way you look at the GS deal, it's a comedown from last year's levels. Adelphia says it paid only 15.2 times the cash flow it expects to generate in its first year owning the properties. By comparison, Cox's Media General buy was valued at 22 times first-year cash flow.

Cable financiers believe that, in reporting its deal at only 15.2 times cash flow, the company is aggressively projecting how it can boost GS Communications. Still, executives familiar with the deal valued it at just 18 times cash flow. "A year ago, we would have been talking 22," said one MSO executive.

Adelphia's valuation reflects a 32% decline. Even the more favorable-to the industry-18 times valuation would mark a 20% decline.

Want worse news? Cash is becoming the currency king, because MSOs don't want to pay in their own common shares now that their stocks have been beaten down 25% to 50% from their highs. Last year's system-price surge was partly due to operators' paying overinflated currency for inflated properties.

Merrill Lynch & Co. high-yield bond analyst said that, 18 months ago, investors regarded cable operators so highly they were lending money more cheaply than perhaps ever in the history of the industry. Cable junk bonds-which fuel the operations of Adelphia, Charter, Mediacom, Insight and some other operators-sold at interest rates just 2.3 percentage points over comparable high-grade treasury bonds. That's almost unfathomably cheap, with relatively low-grade MSOs like Adelphia and Charter selling bonds for 7.5% to 9%.

And as general interest rates have risen, the market's taste for cable has declined. Cable's spread to treasuries is now 4.6%. Charter, for example, was issuing bonds at 8%. Selling the same bond today would require the MSO to pay an interest rate of 11%. That means buyers can't readily afford to pay as high a price for systems as they did last year.

It's looking gloomy for Adelphia. Bond-rating service Moody's was so unhappy with the GS deal it put the company under review for a possible downgrade. Adelphia already has a relatively low Ba3 grade for its senior debt and a low B1 for its subordinated debt.