WHY A NEW LAW COULD MAKE HOLDERS OF CABLE KING TCI 65% TO 100% RICHER IN '96
By JUNIUS ELLIS

(MONEY Magazine) – THESE DAYS IT'S HARD TO POP INTO MONEY'S office in midtown Manhattan without being reminded of the media megamergers developing right here in my backyard. The latest was initiated by no less than Time Warner, this magazine's parent, which is buying out cable-TV pioneer Turner Broadcasting in Atlanta for $7.5 billion. In July, Capital Cities/ABC, located just 16 blocks north on West 66th Street, agreed to a $19 billion bid from Hollywood's Walt Disney. Then CBS on West 52nd Street accepted a $5 billion offer from Westinghouse in Pittsburgh. And don't forget 1994's nearly $10 billion conquest of Paramount Communications, nearby on Broadway, by Viacom in Dedham, Mass. But here's an item of information-age trivia that could possibly lead you to big profits without requiring you to gamble on tomorrow's takeover. What media magnate's stock has fallen 25% in the wake of his firm's failure two years ago to consummate a $20 billion union with a star-struck suitor? The surprising answer is Tele-Communications Inc., the No. 1 cable-TV distributor, with 13 million subscribers and $5 billion annual sales. Yes, I mean the same TCI whose chief John Malone played a pivotal role in the Time Warner Turner deal because of TCI's control of 21% of Turner's stock. TCI's two-year tumble to $17 a share (ticker symbol: TCOMA) seems to have wrung much of the risk out of Malone's debt-ridden but asset-rich company. It now looks grossly undervalued compared with the prices recently paid by acquirers of cable franchises. How undervalued? My sharp-penciled sources figure TCI could be worth as much as $34 a share, 100% more, in 12 months for reasons I explain below. TCI's proposed October '93 merger with $13 billion Bell Atlantic in Philadelphia grew out of Bell chairman Ray Smith's fascination with the then novel concept of a digital highway conveying voice, video and on-line services via combined phone-cable networks that had been modernized with high-speed fiber-optic circuitry. But Smith and Malone apparently underestimated rising political opposition to big cable oligopolies. Industry lobbyists were unable to water down new federal regulations that cut customers' cable bills as much as 16%. The rollbacks cost TCI a total of $300 million in '93 and '94, undermining the terms and prospects of the merger, which quietly collapsed in February of last year. TCI's 1994 operating cash flow suffered a 3% drop to $1.8 billion, while capital spending soared 33% to $1.3 billion. No wonder many investors shunned TCI and other cable distributors, embracing instead the producers of prime-time entertainment, sports and news. Indeed, control of programming has been the main impetus behind media's insatiable urge to merge. So why buy TCI now? I put that question to several noted money managers whose firms have recently increased their holdings of the stock. Foremost is Bill Nygren of Chicago's Harris Associates, a $7 billion investment firm with about $250 million riding on TCI. Nygren is known on Wall Street as the adviser who scored a more than twentyfold profit on Liberty Media, a holding company that was initially spun off to TCI shareholders in 1991 and remains controlled by TCI. Nygren still owns Liberty (LBTYA; $27), which holds TCI's portfolio of investments in about 50 producers of cable programs, including the 21% stake in Turner. "We think Liberty's assets are worth 20% more than the stock," he says.

Nygren, however, is convinced that TCI is now the sector's biggest unrecognized gem because "it's the strongest, most direct play among distributors, which are poised for a comeback." Moreover, if a merged Time Warner Turner lives up to its architects' grand vision, TCI will also profit handsomely via its control of Liberty's 9% stake in the media powerhouse. Over the next 12 months, Nygren sees today's $17 TCI stock rising at least 65% to about $28--still 18% shy of its projected $34 intrinsic value. Here's why I agree: Regulation is going the way of vacuum tubes. Portfolio manager Michael Mahoney of $22 billion G.T. Capital in San Francisco says cable barons are destined to emerge as winners when Congress passes the new federal communications act, probably before year-end. The bill aims to sweep away six decades of dusty regulations and open telephone and cable-TV markets to greater competition. For starters, consumers can forget about any more federally mandated rate cuts. Thus, beginning next year, Mahoney and Nygren both expect cash flow from TCI's cable systems to start growing again at the 10% to 15% annual rate that was sustained prior to the '93-'94 rate rollbacks. They also see deregulation spurring the firm's aggressive entry into the enormous $145 billion market for local, long-distance and mobile phone service. TCI already has a 30% stake in such a phone venture, involving $14 billion Sprint and 10 smaller cable companies, with access to roughly 40% of U.S. households. When can TCI customers anticipate having their dinners interrupted by telemarketers flogging the company's bundled cable, phone and wireless packages? "As early as 1997 in some areas," says Mahoney.

TCI has the jump on competition. Deregulation will eventually allow the seven regional Bells to try to challenge cable by distributing entertainment programs in their service areas. But the unexpectedly high cost of upgrading phone circuits for video has forced trailblazers Bell Atlantic and U S West to put their plans on hold. Meanwhile, TCI is charging ahead to upgrade some 260,000 miles of cable for digital traffic. The company should be able to offer as many as 100 pay-per-view movie and sports channels to half its 13 million subs by 1997, says analyst Tom Wolzien of Wall Street's Sanford Bernstein & Co.

True, you can already buy comparable digital offerings from hot new DBS (direct broadcast satellite) services called Direct TV and Primestar. This year they're projected to triple to about 2 million customers (vs. cable's 62 million) who pay as much as $1,000 for a small dish receiver and an average of $50 a month for programs (vs. cable's $35). What many investors overlook, however, is that TCI is a part owner of Primestar and figures to have more than 550,000, or 28%, of the total DBS subscriber base at year-end, a fivefold rise in '95. Says Nygren: "DBS is teaching skeptical investors a valuable lesson. Viewers will pay more if you give them more."

ALL STOCK DATA AS OF SEPT. 28