Cable companies are beating a path to bank syndication desks as they seek financing for mergers that will help them protect their turf from telephone companies and other information providers.
The cable operators have hit up the banks for 10 big acquisition loans totaling more than $5 billion -- almost 10 times last year's total for cable M&A -- and at least one more major deal is expected before the year is out.
"The level of activity has accelerated dramatically over the past 12 months," said Fred Moran, a communications analyst with Salomon Brothers Inc. "The cable operators are trying to get bigger by merging together to effectively compete in a changing marketplace."
Typifying this move toward consolidation is Comcast Corp.'s purchases of both the QVC Network and Maclean Hunter's U.S. cable properties for a total of $2 billion.
A recent drop in price for cable loans has brought many companies back to refinance old loans. Counting these deals and some general financial restructurings during the year, the total volume of cable loans is about $10 billion.
As banks take advantage of this demand, however, some experts say they are also exposing themselves to an industry with some unusual competitive and regulatory risks.
Significant lending to any industry raises concern in and of itself, since highly leveraged companies usually lose some of their credit rating strength.
"The cable industry was improving itself by reducing its leverage over the last few years," said Rob Nelson, a communications analyst at Standard & Poor's Ratings Group.
"We think that for now, unless companies improve their financial profile significantly, the effect of this competition will be to limit any further upgrade."
Mr. Nelson, however, thinks that many of the cable companies have kept an eye on their financial strength, and that they have tried to arrange acquisitions without significantly altering their credit quality.
Even though Comcast is on credit watch with negative implications, it has raised $250 million in equity from a large California pension fund.
topping off the list of regulatory changes is the Federal Communications Commission raterollback mandate for the second consecutive year. Between Sept. 30, 1992, and February 1994, the FCC required a 17% total rate reduction.
Additionally, cable companies face myriad regulations that sometimes stick them between a business rock and a regulatory hard place when making strategic acquisitions.
Industry followers predict that the most successful cable companies will be those that can cluster their services, particularly in trying to capture target groups of affluent suburbanites that are willing to use their disposable income for enhanced service.
This week, the Federal Trade Commission threw what could be a monkey wrench into that strategy in a ruling on Tele-Communications Inc.'s acquisition of TeleCable.
The FTC required Telecommunications to divest itself of some subscribers in Columbus, Ga., even in areas where the two companies did not currently compete. The FTC used potential competition theory to justify this requirement.
Bankers, however, are not particularly concerned about the regulatory precedent because they say that the subscribers in question amount to a minuscule portion of the total subscribers at either company.
With the regulatory door between the cable and the telephone world starting to swing open, and a free-market-minded Republican Congress in office, both industries are preparing for intense competition. And that should drive more deals.
Industry followers think that each side has some decided advantages.
The telephone companies, such as the Baby Bells, have well-established strong credit histories and respected management. The cable companies, however, have something that industry followers think may be more useful to them than it was to the Democrats in the past election: incumbency.
The cable companies already have direct access to information-rich cable wires, and are working to upgrade their systems.
The ability of cable market players to apply new technology differentiates the successful ones.
Banks have recognized the opportunities in the media market and have acted accordingly. This year, Chemical Bank consolidated its media, telecommunications, technology, and entertainment loan desks.
Other leading lenders to the cable industry include Toronto Dominion, Canadian Imperial Bank of Commerce, Chase Manhattan Corp., First Chicago Corp. PNC Bank Corp., and NationsBank Corp.
Banks recognize that cable companies must adapt to survive. "There is a concern that if cable companies don't actively improve their financial profile, competition could in and of itself result in a ratings decline," said Mr. Nelson.
[CHART OMITTED]
Biggest 1994 deals DealBorrower/ Agent amounttarget banks in billionsRogers * Toronto Dominion $1.80Communication/ * Royal bank of CanadaMaclean Hunter * Bank of Nova ScotiaComcast Corp./ * Bank of New York $1.10QVC NetworkComcast/ * NationsBank $0.85Maclean Hunter's * Toronto DominionUS cable properties * Chase Manhattan
Source: Loan Pricing Corp.
