LatAm Cable Plays Generate Enthusiasm

Hicks, Muse, Tate & Furst and Telefonica de Espana confirmed rumors last week that the they are planning to end their partnership in Argentine holding company CEI Citicorp Holdings, thereby giving a boost to the country's two leading media companies, Cablevision and Multicanal, market sources said.

Both companies are receiving heightened investor interest and are said to have potential upside in their outstanding bonds.

CEI subsidiary Cablevision, which has been virtually paralyzed by infighting between the two former partners, has the most to gain from the breakup. According to the new agreement, Telefonica de Espana will maintain control of CEI and its subsidiary Telefonica Argentina while the Spanish firm will sell its stake in Cablevision to Hicks, Muse, which will remain majority shareholder of the firm.

The positive effect of this decision on Cablevision was reflected in an increase in the price of the firm's outstanding bonds due in 2009, which traded at 98 last week, up from 97 the previous week.

"There have obviously been tensions among the shareholders and there's been a lot of speculation about whether they are committed and willing to put money in," said Bruce Stanforth, Latin American fixed income analyst for BNP Capital Markets. "This clears that up, and now that Hicks, Muse is clearly behind these guys they can go ahead with plans to expand without worrying about the other partner."

While the agreement has freed Cablevision of this Achilles' heel, it is also allowing the company to take advantage of new resources, according to David Taff, telecom analyst in Santander Investments' emerging markets fixed income research department.

"Hicks, Muse has been acquiring cable systems separately from Cablevision but was waiting for a resolution [of the dispute with Telefonica] before deciding what to do with these independent systems," he said. "Now they can merge these systems with Cablevision's and acquire economies of scale. After all, Cablevision already has a system in place, a brand name and purchasing agreements for its programming."

The good news for Cablevision does not necessarily spell bad news for its competitor, Multicanal.

Muticanal is currently involved in its own restructuring due to Goldman, Sachs' decision to purchase an 18% stake in the cable company's owner Grupo Clarin, and it soon will be looking for a strategic partner to help it refurbish and expand its network. Telefonica, which was a partner in Multicanal before hopping to Cablevision in the late 1990s, is a likely candidate, analysts say.

"I think it's very possible, and would definitely provide a boost for Multicanal," Stanforth said. "Since Telefonica was already with Multicanal in the past, they know the operation and it makes a lot of sense for it to happen."

While Telefonica is now on the hunt for a cable system to complement its telephony assets, Multicanal is in dire need of capital to upgrade its facilities. Only 25% of the cable company's network feeder lines have a bandwidth of 750 MHz, which is necessary for pay-per view and Internet services. In comparison, 40% of Cablevision's system has been upgraded to 750 MHz.

The prospects of a renewed relationship with Telefonica and the closure of the Goldman, Sachs acquisition both bode well for Multicanal, Taff said, and the firm's bonds due in 2009 are likely to trade up to a price of approximately 103 over the next three months. That's an increase from current levels of 99.