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The Hot and Cool on MediaOne, and Might Best Buy Be One?

September 08, 1998|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik discuss the merits of individual stocks and other investments.

MediaOne Group (UMG)

MediaOne close Friday: $43.63

Jim: Know what's the first thing MediaOne Group should do, Mike?

Mike: Change its ticker symbol?

Jim: Exactly what I was thinking! You're scary.

Mike: MediaOne has the weirdest symbol this side of Woolworth, which has Z.

Jim: Actually, Woolworth changed its name to Venator Group--don't you love these names they come up with?--so that's now got the Z. Anyway, why does MediaOne have UMG?

Mike: Call it a historical artifact. MediaOne is a cable TV company that used to be called US West Media Group because it was owned by the Baby Bell phone company US West. Just recently it became a stand-alone company, and some readers have asked us to check it out.

Jim: It's got a big presence in Los Angeles, and overall it's the nation's third-biggest cable operator.

Mike: Right. It's got 4.9 million basic cable subscribers--as well as an odd, and hard to value, partnership with Time Warner Entertainment, another cable company. The joint venture is supposed to have a footprint covering nearly 30% of all U.S. households.

Jim: Meaning?

Mike: Meaning it owns the rights to offer cable to geographical regions that encompass 30% of all U.S. households.

Jim: But MediaOne wants to be much more than a cable company when it grows up. It loves to brag about "broad band," which basically means it can shove all sorts of telecommunications and computer services to customers through its cable lines. But then, every cable and telecom firm is promising that. Isn't that why AT&T agreed this summer to buy TCI?

Mike: Yep. "Broad band" is the buzzword with this group.

Jim: And speaking of jargon, reading the financial results of the cable industry is like reading "Alice in Wonderland." For instance, nobody cares about earnings--so forget about using conventional yardsticks with these stocks. The business, and the analysts who follow it, are obsessed with cash flow instead.

Mike: For a very good reason. They have a ton of debt and no profits.

Jim: Right. And cash flow is everything, because it determines whether they can keep servicing, or paying off, their debt.

Mike: They're burdened with debt because they're spending a fortune building their infrastructures--fiber-optic lines, coaxial cables, transmission facilities, you name it. So to a great extent, if you invest in the cable business, you're investing on faith. You believe the cable operators' predictions that one day they'll have profits because they'll have all the infrastructure they need. Most think they'll hit the black shortly after the year 2000. After that, it's gravy.

Jim: Meantime, the brokerage A.G. Edwards says that MediaOne lost $878 million last year and will lose $789 million this year.

Mike: Can't you say anything nice?

Jim: Sure. MediaOne not long ago sold its wireless business--that's mostly cell phones--to AirTouch, which gave them a nice bit of cash to repurchase stock, buy another company or reinvest some other way. And it's a well-run enterprise.

Mike: So we agree the stock's a buy?

Jim: Yes, but not for the reasons I just mentioned. I'd buy it strictly as a takeover play. There's merger frenzy these days in cable, which is a big reason why MediaOne, at around $44, already has shot up more than 50% so far this year, and it's doubled over the last 12 months, despite the stock market's slump in recent weeks. Our colleague Sallie Hofmeister reported last week that Microsoft co-founder Paul Allen is taking a look at MediaOne. So I expect someone will buy them sooner rather than later and--presto!--all those concerns about MediaOne's sorry financial shape will disappear.

Mike: Of course, merger frenzies sometimes happen because buyers believe there's untapped value in the targets. So Paul Allen and I have at least one thing in common. Anyway, in the recent past, cable companies have been great investments.

Jim: Yes, but we're looking ahead.

Mike: Fine. Their business is expanding. They're getting more customers. They're getting higher subscriber rates, because they seem to have snookered Congress in allowing them to raise rates well above inflation. And in that group, you have to give MediaOne a very good look.

Jim: Nothing like having a monopoly in each of your markets to help things out.

Mike: Yes, and don't forget: The AT&T-TCI deal raised the bar for cable acquisitions. It instantly made cable firms more valuable.

Jim: Except that ever since AT&T said it would pay $37 billion for TCI, everyone's been screaming that AT&T's Mike Armstrong overpaid--big time. So maybe these valuations for MediaOne and others aren't as high as everyone thinks.

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