View From City Road: Golden opportunities in television

Anew stock market sector is about to be born - cable TV. To date, the only way into UK cable for ordinary investors has been via the American and Continental companies that dominate the industry; it hasn't been possible to invest directly.

It soon will be. A flood of them are planning stock market floats. Comcast is in the process of going public in the US; General Cable will be floating in the UK in June; Telewest, one of the two largest in Britain, is due to decide over the next few days whether to float in the summer, or, given the present unsettled market conditions, to delay until the autumn; also seriously toying with the idea are Nynex and a host of others.

There are two underlying reasons for floating. Some, particularly the smaller ones, just need the money. Predominantly, however, the reason is that American and Continental parent companies want to attach a book value to their burgeoning British investment programmes. They would also like the companies to become self-funding.

Are they going to be worth investing in? Cynics say definitely not at the sort of valuations being bandied around. It's certainly easy enough to be sceptical. Using the discounted cash flow method of valuation pioneered by Kleinwort Benson and Goldman Sachs, Telewest would command a stock market value of at least pounds 1.75bn, and General Cable pounds 500m-plus.

For businesses that are still in their development phase with no chance of making profits, let alone paying dividends, for some years to come, these seem very fancy valuations indeed. Telewest would be big enough to qualify for the FT-SE 100 share index.

It should also be pointed out that KB and Goldman Sachs are joint advisers to Telewest; such valuations are therefore bound to seem like a lot of self-serving nonsense. Watch out; you are about to be taken for a ride, say the sceptics.

The truth is rather different. No investment is without risk but if you listened to the siren calls of the sceptics you would be missing out on one of the golden opportunities of the decade. It certainly requires a bit of a conceptual leap to get there, but the reality of these valuations is, if anything, on the conservative side.

These are not classic venture capital businesses like Euro Disney and Eurotunnel, where every penny of investment has to be made before the investor is able to make any assessment of whether it is money well spent. With cable, there is already an income stream; the likely level of subscription and consequent return on capital is also well established. Even on the 22 per cent average penetration cable is currently achieving in Britain, the industry produces an eminently acceptable rate of return. If ultimately penetration comes closer to the 37 per cent rate achieved by Birmingham Cable and other high-performing franchises, the return becomes extremely attractive.

In Britain, cable companies are allowed to combine TV delivery with telephony. This has transformed the economics of cable from marginal to spectacularly attractive, and that's before you even begin to think about the wonders of the multimedia age, which cable will be uniquely positioned to deliver.

The parallel here is not with Euro Disney or Eurotunnel but with Vodafone, which was floated in 1988 on a valuation of pounds 1.8bn amid a similar chorus of condemnation. Outrageously, ridiculously expensive, people said. At 56 times historic earnings, it certainly looked it. In nine months, Vodafone's market cap had risen to pounds 5.2bn.