S&P Compares Euro Cable Cos

S&P releases peer report on European cable companies

January 26, 2005

3 Min Read

LONDON -- The credit profiles of Europe's cable operators are largely determined by national cable industry characteristics and the consequential effects on individual player's business risk profiles, according to a peer comparison report published today by Standard & Poor's Ratings Services. The report compares the relative credit quality and rating drivers of three characteristic European cable companies-- Kabel Deutschland GmbH (KDG; B+/Stable/--), Telenet Communications N.V. (Telenet; B+/Stable/--) and Telewest Communications Networks Ltd. (Telewest; BB-/Stable/--).

"KDG, Telenet, and Telewest represent a good cross-section of Europe's cable industry. Although they enjoy similar ratings, each player operates a different business model and carries differing levels of leverage," said Standard & Poor's credit analyst Simon Redmond. "Different expectations lie behind these business models," he continued. "KDG is not expected to grow, whereas growth is a necessary component of the business strategies--and especially the financial covenants--for Telewest and Telenet."

In assessing the business risk profiles of the three operators, the report finds Germany-based KDG has a stable and robust business model, with established cable TV market positions in its domestic regions. It exhibits certain utility-like characteristics, partly as a result of the complex regulatory framework in which it operates. Telenet also has a relatively stable, utility-like cable TV business in the Flanders region of Belgium, although the company is embracing a more risky growth strategy by also selling its services in the competitive telephony and Internet markets. Telewest's business model, meanwhile, continues to mature, with telephony becoming relatively less important as other revenues (premium cable TV, and especially Internet) grow more strongly, typically as part of a "bundled" product offering. Furthermore, unlike KDG and Telenet, Telewest faces intense competition in all its businesses.

For cable operators worldwide, product mix and the level of competition are a function of the domestic market, and Europe is no exception. Over the longer term, it is likely that cable and telecoms operators' product offerings will converge, with the so-called "triple-play" of cable TV, telephony, and Internet services becoming the norm.

"For cable companies, this trend would be partly defensive against the threat from telecoms operators as they pursue additional revenues through the provision of video services over broadband networks," explained Mr. Redmond.

"That said, the transition to a triple-play cable model is neither universally evident nor automatically assumed. Furthermore, it would in many cases require strategic change and significant investment--with consequential funding implications."

As the report points out, although all three operators generate free operating cash flow, their balance sheet leverage differs significantly. KDG and Telenet are very highly leveraged, while Telewest now has significant (but relatively lower) gearing. On an adjusted total debt to EBITDA basis, for example, KDG's and Telenet's leverage should have peaked at about 7.0x, whereas Telewest posted 4.1x and was declining at Sept. 30, 2004. In respect of covenants, KDG is relatively well positioned, mainly due to the fact that its business plan is not predicated on growth. Telewest and Telenet, on the other hand, need to grow their revenues, EBITDA, and cash generation significantly to remain compliant with covenants that become progressively more demanding.

Standard & Poor’s

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