3 Cities Resist Planned Shift in Ownership of Cable TV
Three South Bay cities are balking at approving the sale of their cable television franchises, fearing that service might suffer under new ownership.
The three--Torrance, Hawthorne and Lawndale--are expected to be among a handful of cities nationally not to approve the sale by the June 30 deadline set by a consortium of five cable companies that is buying Group W Cable Inc.
The consortium agreed last December to pay Westinghouse Electric Corp. $1.6 billion in cash and assume $500 million in debt and taxes for 466 Group W cable systems with a total of about 2.1 million subscribers.
Systems to Be Parceled
The five firms--Century Southwest Cable Television Inc., TeleCommunications Inc., American Television & Communication Corp., Comcast Corp. and Daniels & Associates--will divide the 466 systems among themselves.
Under the consortium’s preliminary plans, Century is slated to take over the five Group W systems in the South Bay. Century already owns the cable system in Redondo Beach.
The lack of unanimity will not delay the sale, but it raises doubts about whether Century ultimately will take control of the five South Bay systems.
City officials say that the consortium has the financial and technical ability to operate the systems, but they question whether Century has the money to operate them by itself.
Services Might Be Lost
City officials also fear that services in their state-of-the-art systems would be lost under Century, which has a reputation for running a lean operation.
Leonard Tow, president of Century, which is based in New Canaan, Conn., did not return repeated telephone calls.
A preliminary financial review of Century for the city of El Monte--which has approved the transfer of its Group W franchise to the consortium--found that Century has a debt-to-equity ratio of 15 to 1, which the report said is “extremely high, even for a capital-intensive industry such as cable television.”
Carl Pilnick of Telecommunications Management Corp., the consultant who prepared the study, said in his report the usual ratio is less than 3 to 1.
‘Extreme Financial Pressure’
He said Century’s debt can be compared to “buying a house with a 5% down payment.” While borrowing provides the opportunity to expand with a minimum of equity funds, Pilnick said, “it places all company operations under extreme financial pressure, and it increases vulnerability during times of economic difficulty.”
The report said that with the acquisition of 28 Group W franchises in Southern California, including the five in the South Bay, Century would lose $31.9 million in fiscal year 1985.
Century is buying about 12% of the Group W system, all in California, and will pay about $250 million for about 237,000 subscribers.
Earlier this year, Century sold stock to raise $25 million to reduce its bank debt.
Pilnick said that because of Century’s high debt, it would be “under very heavy pressure to reduce costs.” Still, he recommended that El Monte approve the transfer.
“I can’t in good conscience say they don’t have the money to operate the system,” Pilnick said during a telephone interview. “They’ve got good credit. They can raise money to buy the systems, they can raise money to operate them if they had to.”
However, the three South Bay cities, which combined have about 34,000 subscribers, remain suspicious.
“We will not consider the transfer until we have all the financial information on the specific operator who will run our system,” said Paula Cone, Lawndale assistant city manager who oversees the city’s cable system.
Waiting for Services
Cone and Harry Reeves, who oversees the cable system in Hawthorne, said they also are waiting for Group W to satisfy some provisions of its franchise, including an institutional network that would allow schools, City Hall and other institutions to communicate with each other by cable. Hawthorne also is waiting for more staff and facilities to handle public access programming.
Group W officials have said they intend to fulfill those promises, but they will not say when, and city officials said they will not move on the transfer until the promises are met.
Hawthorne and Lawndale are sharing financial and legal information with Torrance. Coopers & Lybrand, an accounting firm in Los Angeles, will conduct a financial audit of Century for the three cities, and Miller & Young, a communications law firm in Washington, is handling legal matters.
Coopers & Lybrand is expected to complete its financial analysis of Century in six to eight weeks.
Torrance Cable Administrator Warren Carter would not comment on the transfer, but in a staff report recently prepared for the City Council, Carter said approval of the transfer to the consortium should be granted only if Group W and the consortium abide by three conditions:
-City approval would be required before the consortium could change the physical design of the system or change significantly the number of staff members or the management structure.
-Consortium members would be excluded from any interim management role in the Torrance system unless the city determines it to be financially and technically qualified.
-The consortium would agree to be bound by the Group W franchise agreement.
Torrance officials also want to know why and how Century was selected to take over its system and what the consortium would do if the city does not approve of Century as the new operator.
Torrance City Atty. Stanley Remelmeyer said that he has not received answers to those questions and has received conflicting answers on whether approval of the transfer to the consortium and to Century are separate issues.
He said Century has told him that approval of the transfer applies to both the consortium and to his company. Group W officials disagree.
“This is like mass confusion,” Remelmeyer said. “I wish they would get their act together. Meanwhile, we’ll just remain status quo.”
Tow, Century’s president, said in a letter to Torrance Mayor Katy Geissert, “It will be impossible to obtain an agreement on the various terms and conditions you suggest.” Tow said that the city should consider approval of the transfer to the consortium and to Century at the same time.
No Say in Transfer
However, Norval Reece, a Group W vice president in New York City, said, “We prefer to have the consent for the two at one time, but if the city prefers to do it another way, we have agreed to accept consent to the consortium only.”
Reece said that many municipalities--including El Segundo and the city and county of Los Angeles--do not have a say, legally, in the change of ownership of Group W to the consortium.
The handful of cities that have not approved the transfer of stock--including Torrance, Hawthorne and Lawndale--have the right of approval for both parts of the sale written into their franchise agreements.
El Segundo last week announced that it will try to buy its cable system from Westinghouse rather than allow the proposed new owner to operate it.
Low Purchase Offer
Mayor Jack Siadek, who has been pushing for the public purchase of teh city’s deteriorating, 18-year-old cable system, said his City Council voted unanimously last week to make an offer for the system.
Siadek said that because of its poor condition, the city will offer only about $600 or $700 per subscriber for the 30-channel system with 3,400 subscribers. The industry standard is about $1,000 per subscriber.
Group W’s Reece said that only about four of the firm’s 466 franchises have expressed an interest in purchasing their systems.
He said that no offers have been received, but that his company would be willing to discuss the matter with any city, including El Segundo.
Gardena Stands Alone
In the South Bay, only Gardena has approved the Group W transfer, but it is reserving final approval of Century until a financial audit of the company is completed.
“We feel very comfortable in approving the transfer of stock to the consortium,” said Gardena City Manager Ken Landau. “The consortium has $1.1 billion in cash. Plus, we are still reserving the right for approval of the final operator.”
Gardena is also the only South Bay city to reach agreement with Group W over changes in the franchise agreement sought by the cable company that allow a decrease in available channels and in money for public access programing, some of the changes the other South Bay cities fear Century will ask for.
Under the term of the purchase agreement between Westinghouse and the consortium, not all cities have to approve the transfer for the sale to be completed. In fact, Westinghouse had expected that franchises with about 25% of its subscribers would not approve the transfer by June 30.
Not having the three South Bay cities approve the transfer will cost Westinghouse about $25 million in revenues until all the sale is completed.