IMPACT OF THE BELL ATLANTIC / TCI DEAL : How Can Investors Jump on Media Bandwagon?

For investors, it would be easy to argue that the Bell Atlantic/Tele-Communications Inc. deal is the capper for this year’s frenzied rally in media and telecommunications stocks.

RJR Nabisco II, you might call it, remembering the mega-deal that figuratively closed the book on the ‘80s.

It would be easy to argue this. But it would be wrong.

John Malone, cable TV’s reigning genius as TCI’s chief, will own something on the order of $1.1 billion in Bell Atlantic stock if this deal goes through. Malone, as a wealth-builder, ranks with the best of them--Kerkorian, Buffett, Tisch, Singleton and a few others.

You can say many things about Malone, but you can’t say he likes to lose money. If he’s taking Bell Atlantic stock as payment for folding TCI into Bell Atlantic (and some would question which company is being folded into which), it’s a very good bet that Malone expects the share price, $67.625 today, to be substantially higher before the decade ends.

Across the broad expanse of media and telecommunications companies, there’s no question that many of the stocks now appear pricey at best and absurdly expensive at worst. Cablevision Systems, the nation’s fourth-largest cable TV operator, has seen its shares rocket from $29.375 in spring to $65.625 now, a 123% rise. That for a company that has yet to turn a profit.

But are the stocks truly overpriced now--or were they severely underpriced before?

Fair value is a moving target, yet Wall Street pros say it is logical that the Bell Atlantic/TCI deal has forced investors to reconsider the long-term earnings potential of the communications business. If you raise the earnings numbers, you move the stocks up as well.

“With this deal, when you add 1 + 1 you are likely to get much more than 2,” argues Morris Mark, a New York money manager who long has been a major investor in media stocks.

Like many Wall Streeters, Mark sees the merger as a watershed event that reinforces the inherent attraction of American media and technology--and their awesome capabilities. “What the rest of the world wants is what we can provide,” Mark says.

This is no start-up industry. The media and telecomm companies include some of America’s most financially capable and innovative businesses.

Nor are the takeover deals in the industry akin to the bust-up, get-rich-quick schemes of the ‘80s. The new wave is about creating new products and services--and about leading globally.

Most important, this is an industry that wants to bring a multitude of new entertainment, information and shopping services directly to your home. Yes, it will take time, and there will be many potholes in the information highway. But to argue that consumers won’t use it is to be back in 1950, contending that television’s potential is limited at best.

For investors, which parts of this vast business make the most sense now? Here’s how the pros see it.

* The Baby Bells may be a layup. On Wednesday, while Bell Atlantic’s stock surged after the TCI deal was announced, the shares of the other six Baby Bells fell. But on Thursday, Wall Street had second thoughts--and buyers suddenly roared into the stocks. Among them, Pacific Telesis rose $1.75 to $55; Southwestern Bell soared $3 to $43.

Why? Investors believe the other Bells now have no choice but to accelerate their moves into cable TV and other businesses that will give them a full menu of technologies to offer customers. “The pace is going to pick up, and there’s going to be more spending by everybody involved,” says Bruce Behrens, manager of the Flag Investors Telephone Income stock fund.

It doesn’t matter that these moves will dilute near-term earnings, analysts say; investors are in the mood to reward vision.

Most of the Bell stocks today are selling below their all-time highs, for cheap price-to-earnings ratios. These stocks largely have been dead in the water since 1989, because the market couldn’t see substantial long-term growth in them.

Interestingly, the cable TV stocks, too, lay dormant for four years before they sparked to life last spring. Now, Wall Street sees them in a totally different light. Likewise, it’s a good bet that investors are early in rethinking the Baby Bells. And in any case, it would be hard for investors to value these stocks much lower than they have over the past year.

* The programmers still look cheap. Shares of Disney jumped 12% on Wednesday, but by Thursday, investors were again focused on Disney’s short-term troubles (Euro Disney) instead of its long-term value as a software supplier to the information highway. The stock slipped 62.5 cents to $43.875 Thursday.

Media investor Mario Gabelli contends that “all roads still lead to Hollywood.” The programmers hold the ultimate franchise, he says, because the information highway is meaningless without programming.

If the payoff for his huge Paramount Communications stake were in hand, Gabelli says, he would be using it to buy Disney. He also is a big Time Warner holder.

Herb Ehlers--whose $6-billion-asset Eagle Asset Management in St. Petersburg, Fla., also is a major media stock owner--sees Turner Broadcasting and Gaylord Entertainment as two programming stocks still worth buying. Gaylord, he notes, is the franchise in country music, the nation’s most popular music form.

* Some cable assets haven’t been fully recognized. While Comcast Corp. and Cablevision already have been labeled certain takeover candidates, stocks of companies that own cable as part of diversified media assets don’t yet reflect the cable systems’ newly appreciated value, Ehlers says.

He counts Media General, Multimedia Inc., Los Angeles Times publisher Times Mirror and Knight-Ridder among the stocks that have “30% to 40% potential gain in them,” if their cable systems are valued at the same price that Bell Atlantic is paying for TCI.

As Cable Stocks Zoom....

Year’s highest stock price, 1983-1992, plus latest:

Thursday Close:

Tele-Communications Inc.: $32.88

Comcast Corp. A: $40.63

Year’s highest stock price, 1983-1992, plus latest:

Thursday Close:

Bell South: $60.63

Bell Atlantic: $67.63

US West: $49.63

All prices adjusted for splits where applicable.

Source: Value Line Investment Survey

Media/Telecomm Funds

For investors who don’t want to pick individual stocks, an easy, diversified way to buy into media/telecomm is via one of these mutual funds.

Fund 1993 gain 800-phone S.B. Shear. Telecomm. Gro. A* +42.8% 544-7835 GT Global Telecomm A* +40.5% 824-1580 Gabelli Value +39.3% 422-3554 Fid. Sel. Broadcast/Media +38.9% 544-8888 Fidelity Select Telecomm +37.5% 544-8888 Invesco Leisure** +36.7% 525-8085 Fidelity Sel. Dev. Comm. +34.4% 544-8888 Seligman Communications +29.8% 221-2450 Flag Inv. Telephone Inc. +20.8% 767-3524 Gabelli Asset** +19.9% 422-3554 Montgom. Global Comm.** NA 428-1871

** denotes no-load (no sales charge) funds

* these funds also are available without an upfront load, but with a redemption fee.

NA: not avail. (new fund)

Source: Lipper Analytical Services