Standard Life Investments

Published Article

Investment Adviser – Trade of the Week – Global Equities


 

We have long held a view that cable TV and broadband operators will be winners in the new digital economy. Cable networks are better suited to delivering high speed two-way data connections. This is important for internet speeds, where cable can offer over 100Mbps versus copper wire ADSL which usually manages speeds “up to” 24Mbps. In pay-TV cable offers the video on demand services, catch-up TV and multiple HD channels, compared to one-way broadcast only satellite pay-TV offering.

With our global coverage, we took our knowledge and experience of the US cable firms and applied this to the European cable industry. In the US we had seen Telcos try and fail to win against the cable operators with their ADSL and fibre offerings and realised that the cable advantage was getting stronger.

We also understood that such high speed networks were increasingly valuable to other telecom operators. The continuing roll out of WiFi in homes and public spaces is both a threat and opportunity to mobile operators – the threat is that WiFi could compete with the mobile network; the opportunity is for mobile networks to lower costs by offloading traffic onto the much cheaper WiFi. Therefore we saw the possibility of cable companies becoming partners or bid targets for mobile operators.

Virgin Media is the only UK cable operator. When we bought the shares the market was worried about its debt and the ability of the company to repay it. Working with our corporate credit team we saw that Virgin Media debt was manageable, and the company was gradually refinancing it, reducing interest costs and leading to earnings upgrades.

Since our first purchase the shares have outperformed the MSCI World index by over 50% and Liberty Media, a European cable leader, had bid for the company in a cash and stock bid. We still own Virgin Media in the Global Equity core funds, but sold it from the Unconstrained and Income portfolios following the bid.

We saw the same dynamics in Kabel Deutschland, a German cable operator. The German market is earlier in its development, so we saw an opportunity for history to repeat itself. Since we established a position the company has delivered a string of good results and the shares have outperformed the MSCI World Index by 37%. Recently shares had been strong which might suggest Vodafone are looking to buy the company and we continue to own Kabel Deutschland across the funds, including Global Unconstrained and the Global Income funds.

Success of high speed broadband operators like Virgin and Kabel Deutschland are increasingly impacting the traditional TV media business. In the US and globally we see a new business model emerging. Companies like Netflix, Hulu, Amazon / LoveFilm are offering TV and film content as streaming video direct to subscribers’ computers, tablets, game consoles or other devices.

These services are competing with traditional Pay TV operators for content, giving content owners pricing power. One beneficiary of this trend is Time Warner, which owns highly successful HBO TV channel and of the rights to US college basketball franchise. It will soon begin re-negotiating its content sale agreements, and we expect it to achieve strong price increases. Operating leverage in its model might result in earnings upside which is not yet priced in to the market and lead to a higher dividend stream.

Mikhail Zverev, Head of Global Equities and Fund Manager, Global Equity Unconstrained, Standard Life Investments.