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Its bad, but it could be worse

Ask cable operators what's at the top of their list of financial
worries, and they don't cite drought of mergers, the IPO market or climbing
interest rates.

"I'm worried about all of us executing," said the CEO of one MSO,
echoing the private sentiment of many industry executives.

Operators have so heavily touted the financial promise of all the new
video, data and telephone products their upgraded systems can deliver, the
market is transfixed on the smallest signs of problems and will freely hammer
all operators for the flaws of one. Cox Communications proved that when a tiny,
tiny $3 million problem sank all cable stocks after the end of the second

At the same time, clear delivery on promises about new
"revenue-generating units," operators 'parlance of the day, could immunize MSOs
from the anxieties plaguing Internet start-ups, TV stations and failing
competitve local-telephone companies.

While cable stocks have gotten hammered along with the rest of the
market in recent months, there are bits of good financial news. MSOs generally
took full advantage of the favorable equity and debt markets of the past two
years and raised enough money to complete the system rebuilds so important to
adding new products, staving off competition from digital broadcast satellite,
and growing cash flow.

"I've never been more bullish about the business," said Time Warner
Inc. Chairman Jerry Levin. His cable operations, along with those of Charter
Communications, have generated strong, stable cash-flow growth over the past
two years and are starting to put up strong numbers on digital cable and
high-speed Internet. "The margin on these things is incredible," Levin

Cable stocks haven't been battered as badly as Internet issues, but
MSOs have little to brag about. The Broadcasting & Cable/Bloomberg cable
index is off 30% for the year vs. 58% for Internet stock. But the S & P 500
is off just 8%, and even the battered Nasdaq Composite has fallen only 20%.

That's a stark contrast to last year when four MSOs went public,
raising $4 billion, and everyone used inflated shares as currency to gobble up
all the cable systems they could find.

MediaOne Group Inc., Bresnan Communications Inc., Century
Communications Corp. all got swallowed by even bigger players.

Selling stock at recent low prices would be unappealing to any
operator today. "The market is just in disarray," said Insight Communications
President Michael Willner, who took his company public last year. "Some of the
telecom stuff has overflowed to us. But cable companies are not some
underfunded CLEC [competitive local exchange carrier]."

The good news is that, for those that need cash, the debt markets seem
to be open. No. 3 MSO Comcast Corp. recently refinanced the bulk of its balance
sheet, part of it with short-term, low-cost commercial paper, a thought that
would have been a joke for a cable operator three years ago. A month ago,
Adelphia Communications completed a $750 million junk-bond deal, and Insight is
in the market for $500 million.

But debt is certainly more expensive, not just because broad interest
rates have risen but because cable is perceived as a greater risk. At the
beginning of 1999, investors were willing to buy cable junk bonds yielding
interest of just 2% to 2.5% above comparable high-grade treasury bonds. Now the
spread to treasuries is 5% to 6%. So operators' interest costs may have gone
from 8% to as much as 12% to 13%.

This market is shaping up to be a nightmare for financiers whose
bonuses are dependent on cable deals. A few major investment bankers will be
fattened by America Online's takeover of Time Warner Inc., Cablevision's sale
of its non-New York systems and the likely sale of DBS service DirecTV.

But when it comes to straight system sales, the market looks pretty
quiet. "We're not seeing anything," said Comcast CFO John Alchin. "Maybe a few
thousand subs at a time."

The only recent buzz is Adelphia Communcations' willingness to pay
record prices for system groups that aren't obvious fits with the company's
existing clusters-and then clouding the price. The company agreed to pay
$750 million, or around $5,800 per subscriber, for a group of Maryland systems
from GS Communications. But Adelphia sought to avoid detailing the price by
blending it with a smaller deal and announcing a package bought for $5,400 per

The company has quietly agreed to pay an even higher price, $6,200 per
sub, for Daniels Cablevision's systems in California but hasn't actually
announced the deal or its price.

But those properties combined involve fewer than 200,000 subscribers.
"If we're all getting excited about those, that proves there's nothing going
on," said one investment banker.

Adelphia is widely expected to be the next seller, but dealmakers
don't expect the Rigas family that controls the company to do anything unless
stock prices dramatically recover. Most of the other top-10 players are seen as
in it for at least another three to five years, save for AT & T's perhaps
spinning off its cable operation into a separate company.

More good news is that investors' fear of competition is starting to
abate. Telephone companies, notably divisions of SBC Corp., were once
considered a harsh threat but now are looking to abandon their video

Bad news for competitors helps. After being trapped in a downdraft
most of the year, cable stocks rallied three weeks ago on news that DirecTV's
subscriber growth was starting to fall short of expectation. DirecTV and fellow
DBS provider EchoStar are MSOs' most formidable enemies, already capturing more
than 12 million homes that were cable's to lose.

The good news for operators about the dark capital markets is that it
makes it hugely difficult and expensive for overbuilders to raise cash.

Companies like Knology and Wide Open West can cause more pain for
operators because they tend to provoke price wars that DBS services have
avoided. The biggest overbuilder, RCN, raised about $4 billion when the markets
were good, so it is likely it's sufficiently funded to continue its buildout.
But other companies need further rounds of fund-raising to continue their
quest. With the market soured, though, being needy is a more of a major
corporate flaw than it was a year ago.