One of the great mantras of media life has been "content is king," and it’s absolutely true in certain contexts. But in today’s heated atmosphere of corporate consolidation, another slogan has been gaining prominence: "cash is king." That’s the theme behind the stampede of private equity groups into ownership of seasoned companies with well-known brands and dependable cash flow. Owners of such companies have varied reasons for selling (including reluctance), but bidders for the likes of Clear Channel (radio), Tribune (newspapers) and the next two-three cable MSOs to go have their sights set on the cash registers inside these media stores. Cable has been a high cash generator since day one, 58 years ago, when operators were able to get their total capital investment returned from just the installation fee, followed by $5/mo. for what seemed like forever. In the 1980s, install fees began to disappear as franchises grew bigger and more competitive. But by then, monthly revenue per sub had quintupled to the princely sum of $25/mo., and acquisitions had begun in earnest.
There were times—1974, 1990-92, 2002—when financial darkness descended on cable. Its cash flow, versus capital expenditure and debt, was strained, and its competitive future doubted. But for most of the industry’s operators, that was never their destiny. As the accompanying table shows, the two largest MSOs now generate an estimated $8 billion of not only cash flow, but free cash flow (operating income minus capital expenditures). There are more conservative measures of FCF, primarily accounting for interest on debt, and many operators are marginal in the category, but prospects are good.
One of the knocks on operators has been perpetual capital expenditures, but little note has been taken of the ease with which they have been financed. Cable was hit so hard in the credit crunch of 1990-92 because in the late 1980s it had become the second-most desirable business to lend to, after real estate. Until it achieved the elite status of "investment grade" in the last decade, cable made commercial lenders, insurance companies and pension funds rich by the combination of trustworthy cash flow and a willingness to pay up for borrowed money.
Now it’s private equity that hunts for cable’s solid balance sheets. And though the feds are beginning to look into potential abuses of committee bidding by private giants, operators are of the view that it’s good to be the king.
Paul Kagan is chairman/CEO of PK Worldmedia, Inc., in Carmel, Calif. He owns shares of Time Warner and Comcast. Information in his columns is not intended to be a recommendation to buy or sell securities.