Market buries cable shares

INVESTING in cable television companies is not for the faint-hearted.

They make no money and pay no dividends, so normal valuation methods such as price/earnings ratios and yields do not apply. Instead, highly paid analysts spend hours punching numbers into computer spreadsheets, adjusting complex discounted cash-flow models to arrive at precise valuations.

And nobody takes a blind bit of notice.

For the cable sector - like few others - is driven by something altogether less scientific: sentiment. And in recent weeks, this most intangible of all stock market forces has been at work on both sides of the Atlantic, taking its toll on technology stocks in general and quoted cable operators in particular.

Shares in Britain's two biggest cable companies plumbed new depths last week. TeleWest, six times oversubscribed when offered to investors at 182p in November 1994, now languishes at just 139p, while Nynex CableComms, floated at 137p in June 1995, can now be picked up for a pound.

General Cable, the third quoted cable player, has fared a little better; at 166p, its shares are just 24p below their flotation price. But even this modest performance is only due to a last-minute slashing of the offer price last April after a lukewarm response from potential investors.

A spokesman for a fourth operator, Canadian-owned Bell Cablemedia, insisted a London listing was still on the cards "if and when market conditions are right".

There is no evidence that the fundamentals of the cable industry have undergone a sudden seismic shift for the worse. True, Nynex last week took the unusual step for a growing company of announcing job cuts - 310 of them, equivalent to 11 per cent of the staff.

But analysts said Nynex was merely adjusting its costs to lower-than- expected revenues, coming into line with the industry average.

Few shocks are expected when Nynex and TeleWest publish fourth-quarter results in the next week or so. Churn - the number of customers who fail to renew their subscriptions - is over 40 per cent in some franchise areas. And penetration rates - the ratio of subscribers to cable-connected homes - remain disappointing, especially for the pay-TV.

Potential customers seem to care little whether they receive their diet of cartoons, game shows and topless darts down a wire or from a dish.

Where cable can score is in providing cheaper telephony services. The industry is luring 50,000 customers a month from BT, and forecasts indicate that cable could take up to 9 per cent of the telecoms market by 2004, up from 1 per cent, with 4 million cable telephone lines by end of the decade.

Unfortunately, it is at this point that sentiment re-enters the debate. It is no coincidence that cable share prices started to slide just after Labour Party leader Tony Blair announced his information superhighway "deal" with BT last autumn. He seemed to suggest that the ban on BT carrying broadcast entertainment down its wires until 2001 would be lifted at or before the 1998 review date.

Any such move would almost certainly scupper cable's best-laid plans. The cable companies have already spent an estimated pounds 5bn building a nation- wide network of franchises and the same amount again is needed to complete the roll-out programme, making it the biggest infrastructure project this country has ever seen. From virtually a standing start five years ago, almost 100 cable franchises split between 15 main cable operators now pass 6 million homes. TeleWest is the largest operator following last June's pounds 690m merger with SBC Cablecomms to create a company which can serve 4 million homes.

Funding for the cable players already mentioned should not be a problem as they are all backed by big parent companies with deep pockets and long experience of the industry.

But with Labour streets ahead in the polls, the political risk of investing in cable companies is unlikely to go away.

Other regulatory concerns are also unresolved. BT and telecoms watchdog Oftel are still locked in mortal combat over crucial pricing and competition issues, while the Office of Fair Trading is investigating BSkyB's dominant position in the pay-TV market.

Investors are likely to give the cable sector a wide berth until this fog of uncertainty lifts, even though some factors are clearly working in its favour. Number portability is due to be introduced later this year, allowing telephone users to keep the same number for life. And the introduction of home banking and interactive shopping is just around the corner.

It is also likely that the cable industry will consolidate further to perhaps half a dozen players within the next three years.

By then, the first profits should be rolling in and the identity of the successful cable operators should be known. But only the bravest investor will risk piling into the sector now - even at these lowly levels.