Now Caught in Middle of Canadian Takeover Fight : Valley Cable Seeking to Escape Troubled Past

The mistakes of the past still haunt Valley Cable TV.

Plagued until recently by unexpectedly high construction expenses, service foul-ups and other costly problems, the Chatsworth-based cable-television company has chalked up losses of roughly $60 million since opening for business in May, 1981. Those losses, in turn, have burdened Valley Cable with a hefty debt that hangs on the company like a financial albatross.

Taken together, Valley Cable’s debt and four-year history of losses have helped make the company an apparently unwanted stepchild in a Canadian corporate takeover fight, despite improvement in the company’s performance.

Two Canadian media companies are bidding for Toronto-based Standard Broadcasting, owner of Valley Cable, but each has made its acquisition offer contingent on getting an option to dump the cable-television concern.

Valley Cable “has had a rocky road,” explained Rafe Engle, president and chief executive of Selkirk Communications, one of Standard Broadcasting’s two suitors. “It’s been an experience that’s been difficult for Standard.”

The road that Valley Cable is on, however, has taken a sharp turn for the better since Standard Broadcasting gained control of the operation a year ago. The company’s list of subscribers has risen and customer complaints have fallen sharply.

Modest Financial Prospects

Valley Cable executives say that, partly because of that improvement, the company will become profitable in about two years.

But Valley Cable’s troubled past has left it with a reputation among analysts as a problem company with modest financial prospects.

Not that Valley Cable, which serves 56,800 subscribers in the western San Fernando Valley and the city of San Fernando, is an open book to the financial community. Executives at Standard Broadcasting and Hollinger Argus, Standard’s parent and Valley Cable’s corporate “grandparent,” have released relatively few financial details about the cable-television concern.

In fact, Engle said he wants the option to sell Valley Cable back to Hollinger Argus if he acquires Standard Broadcasting in part because Valley Cable’s financial status is “a mystery.”

The future ownership of Valley Cable is anyone’s guess. The cable operator could easily find itself owned directly by Hollinger Argus, or in the hands of whatever company ends up buying Standard Broadcasting. It also could be severed from the rest of Standard Broadcasting, returned to Hollinger Argus, then sold to someone else.

What is clear about Valley Cable is that it has come a long way from the days when it was troubled by construction costs and dissatisfied customers. Valley Cable suffered from a bad case of the ailments that afflict most young cable-television companies in big metropolitan areas.

Cable operators typically lose money in their first few years because they lay out large sums to build systems while taking in little revenue from subscribers.

Cable America, the Canadian company that controlled Valley Cable for its first three years, compounded the problem by agreeing to construct its system at a pace that was faster than it could afford or manage.

The new management installed by Standard Broadcasting moved quickly to turn the situation around.

Frank McNellis, Valley Cable’s general manager, said the company upgraded its service by retraining its repair crews and dispatchers. He said that, on average, a customer now only needs a service call once every two years, a sharp improvement from early 1983, when the average customer needed a service call every five months.

At the same time, the company has been reorganized into a leaner operation. The current employment stands at 155, down from 238 two years ago. Valley Cable executives said that, by consolidating the customer service unit, they made life easier both for the company and for customers--who previously had to call one department if they had a reception problem and another department if they wanted to add a pay channel.

Average Bill $31 a Month

To raise more revenue, Valley Cable boosted its rates two months ago. For its basic 39-channel service, Valley Cable charges customers $12 monthly. But, with optional extra channels, the company’s average customer now pays about $31 monthly, about $1.60 more than before the increase.

Meanwhile, the red ink continues to flow.

Despite Standard Broadcasting’s recent infusion of $19.1 million into Valley Cable to reduce its debt, interest expenses, along with depreciation and spending for equipment, will eat up Valley Cable’s operating profit this year, its first ever.

Valley Cable projects a net loss of $13.4 million on revenue of $19.1 million during the fiscal year ending Aug. 31, compared to a net loss of $17.4 million on revenue of $16.1 million last year.

Other statistics show how the company lags slightly behind the standards set by successful cable operators.

40% Penetration Rate

Carl Pilnick, a Los Angeles consultant who advises cities on cable-television issues, said healthy cable-television operations after five years typically generate more than enough cash flow to cover all expenses, including interest, and frequently show a net profit. By the time Valley Cable reaches its fifth birthday next May, the company will still be losing money, but it expects to have enough or almost enough cash flow to meet all expenses.

Pilnick said successful cable firms also usually achieve a penetration rate of about 40%--meaning that they sell their service to 40% of the homes that can order it--after five years. Valley Cable, whose current penetration rate is 32%, expects to reach a 40% rate late in 1986.

Although many companies turn a profit with a 40% penetration rate, Valley Cable executives say their company will not be profitable until it serves 43% of the homes in its market, if current patterns continue.

Some analysts say the company’s long-term potential for profits is limited.

18 TV Stations in Area

They say that cable companies in California, and particularly in Los Angeles, typically suffer from below-average penetration in part because of the availability of many broadcast television stations. In the Los Angeles area, there are 18 broadcast television stations.

“Once you’ve got that much choice to begin with, it’s difficult to bring in other stations with something new,” Pilnick said.

Although many of the nation’s leading cable-television companies are financially healthy, the industry is in a period of declining expectations. Consumers have not taken to cable television as enthusiastically as cable entrepreneurs once expected, and products such as videocassette recorders have provided stiff competition.

All that has helped make Valley Cable, in the eyes of Canadian securities analysts, a bad company to buy.

“Standard has made some improvements, but it’s been a long time coming,” said Rex J. McCafferty, an analyst with Dominion Securities Pitfield in Toronto.

Valley Cable officials, however, say that Standard Broadcasting’s recent cash infusion has made their company worth something in the marketplace by trimming its debt. But they conceded that Valley Cable might have to take much of that debt back if it is sold to Hollinger Argus, a privately held company headed by Conrad Black, a Canadian businessman well known for buying and selling big companies.

Will Probably Sell Firm

The sale of Valley Cable is considered a likely outcome of the tentative agreement calling for Hollinger Argus, Standard Broadcasting’s parent, to sell its 49% controlling interest in Standard to Slaight Communications.

Because of Valley Cable’s past problems and Slaight Communications’ relatively small size--it owns only two radio stations and a billboard company--Slaight is expected to take advantage of its option to sell Valley Cable back to Hollinger Argus.

Valley Cable “currently is looked on as a pretty serious drain,” said Allan Slaight, president of Slaight Communications. “Our bank certainly liked our getting this option.”

Slaight Communications would have plenty of time to consider the cable company. Canadian regulators are expected to take until October to decide whether to approve the acquisition of Standard Broadcasting, and Slaight Communications would have another month to exercise its sell option.

But it is not guaranteed that Slaight Communications will be the buyer of Standard Broadcasting. Although Slaight Communications said it had acquired 53% of Standard Broadcasting’s stock as of last Thursday, Selkirk Communications launched a competing tender offer Friday.

Canadian media executives familiar with the bidding speculated that Selkirk Communications was trying to thwart Slaight Communications from acquiring the two-thirds interest in Standard Broadcasting that it would need under Canadian law to merge with Standard.

Slaight Communications’ offer for all of Standard Broadcasting’s 5.9 million shares is $22 (Canadian) a share, or a total of $95 million in U.S. dollars at current exchange rates. Selkirk Communications’ original offer was $24 (Canadian) a share, or $104 million in U.S. dollars. On Monday, the bid was conditionally increased to $25.

Potential Tax Benefits

Even if Slaight Communications or Selkirk Communications sells Valley Cable back to Hollinger Argus, it might not be the end of Valley Cable’s journey through the world of corporate acquisitions.

Some analysts suggest that Toronto-based Hollinger Argus would sell Valley Cable to a company with substantial U.S. interests.

That theory is based on one of Valley Cable’s main attractions for a prospective buyer, its potential tax benefits. A U.S. company could use Valley Cable’s losses and unused investment tax credits to reduce its income taxes.

On the other hand, some Hollinger Argus officials are said to feel that the worst is over for Valley Cable and that it should be held as a long-term investment.

Slaight said that, during his negotiations with Hollinger Argus, its executives have projected “a positive feeling about the future of Valley Cable.”