The exodus of big regional telcos from cable continued last week as GTE Corp. hired an investment bank to look for a buyer for its systems.
GTE-which has about 123,000 cable subscribers in Clearwater, Fla.; Thousand Oaks, Calif.; and Oahu, Hawaii-hired New York investment banker Goldman, Sachs & Co. to explore the possibility of selling those operations.
The move came as GTE approached the close of its $61 billion merger with Bell Atlantic Corp.-a telco that once tried to buy Tele-Communications Inc., then wanted to overbuild cable systems with digital-wireless technology, and finally opted to resell direct-broadcast satellite service.
GTE's move follows efforts by big regional telcos-notably SBC Communications Inc.-to bail out of cable systems they either built or acquired.
GTE spokeswoman Bobbi Hennessey said the telco was exploring a sale of the cable properties, but it would also consider upgrading them.
Most industry observers thought the prospect of an upgrade was unlikely, given the additional capital it would require. "Bell Atlantic's been there, and it doesn't like the business," one industry observer said.
Hennessey said the decision was unrelated to the pending acquisition by Bell Atlantic, and the cable operations would continue to operate normally until a decision was made.
"The technologies involved in delivering the service have really changed and advanced since we initially began offering the service," she said. "We're not sure that this is the technology we want to roll out nationwide in the future. We're looking at the option of potentially selling these systems to buyers that would have more use for that kind of technology on a regional or local basis."
The pool of potential buyers may be shrinking, though.
Since 1997, telco operators have put up for sale cable systems with roughly 640,000 subscribers. To date, less than one-half of those subscribers have actually changed hands, the biggest being SBC's sale of its 268,000-subscriber Washington, D.C., system to Prime Cable and The Carlyle Group in 1997 for $635 million. That price was $15 million less than what SBC paid for it three years earlier.
SBC has been pulling back from cable ever since it scrapped Pacific Telesis Group's nascent cable operations when it bought the Baby Bell in 1997. The company is headed down the same road with another recent acquisition, seeking a buyer for Ameritech Corp.'s cable operations, with 300,000 subscribers.
Southern New England Telecommunications Corp., which SBC purchased in 1999, will likely keep its 30,000-subscriber system in Connecticut operational for now, at least partly due to pressure from state regulators.
"What we're seeing is that the whole [regional Bell] overbuilding strategy is so local and regional," PaineWebber Inc. vice president of research Thomas Eagan said. "There are pockets of success across the country, but nationally, it is a nonstarter."
GTE got its first cable franchise, in Thousand Oaks, in 1995. It joined one of the two big telco-video consortiums, Americast, along with Ameritech, SBC, BellSouth Corp. and The Walt Disney Co.
At one time, GTE claimed that it wanted to "build video networks in 66 U.S. markets, reaching about 7 million households, by the year 2004."
The most likely candidates to buy GTE's systems are other regional overbuilders, such as RCN Corp., WideOpenWest LLC and Western Integrated Networks LLC, analysts said. Officials at those competitive cable providers did not return phone calls late last week.
RCN was said to be weighing a bid for the Ameritech systems. But sources in the cable-brokering business said RCN has lost interest due to the high price.
While other overbuilders have raised vast sums to build out their networks, they may not be willing to spend a lot for the GTE properties.
"The fact is that pricingwise, they might have trouble," said one industry source who asked not to be named. "People are not looking aggressively to buy GTE's problems."
Cable operators that GTE overbuilt are not likely candidates due to Federal Communications Commission rules that prohibit incumbents from buying out overbuilders in their service territories.
Also, finding a single buyer that wants to buy systems in Florida, California and Hawaii-especially ones that face stiff wired-cable competition-could be difficult. The GTE systems have penetration rates of about 20 percent in their respective markets, according to some observers.
"The Southern California market may be worth it to a lot of people," SG Cowen Securities Corp. analyst Gary Farber said. "Maybe they could step up with a more aggressive marketing push and fine-tune the marketing for digital. Maybe somebody does bid on it, but it's not clear who that is going to be."
The industry average for cable-systems sales this year has been about $4,500 to $5,000 per subscriber, which could give the GTE systems a potential value of between $553.5 million and $615 million. But most observers believe the GTE properties would sell for substantially less.
The Hawaii system is harder to value because it utilizes multichannel-multipoint-distribution-system technology, which is mainly being used these days for data distribution. The rest of the GTE systems are coaxial-based.
