We have long held the 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 more than 100 megabytes per second (mbps) versus copper wire ADSL that usually manages speeds “up to” 24mbps.
Pay-TV cable also offers video-on-demand services, catch-up TV and multiple high-definition channels, compared to one-way broadcast-only satellite pay-TV offerings.
With our global coverage, we took our knowledge and experience of the US cable industry and applied this to the European cable sector. In the US we had seen telcos try and fail to win against the cable operators, 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 mobile networks; the opportunity is for mobile networks to lower their costs by offloading traffic onto much cheaper WiFi set-ups. 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 its shares, the market was worried about its debt and the ability of the company to repay it. Working with our corporate credit team, we realised 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 more than 50 per cent. Furthermore, Liberty Media, a European cable leader, had bid for the company in a cash-and-stock offer. 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 in the early stages of 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 its shares have outperformed the MSCI World index by 37 per cent.
Recently its shares have been strong, which might suggest Vodafone is looking to buy the company. We continue to own Kabel Deutschland across the funds, including the Global Unconstrained and Global Income funds.
Mikhail Zverev is manager of the Standard Life Investments Global Equity Unconstrained fund
