WHAT price a slice of a loss-making cash-guzzling, incomplete cable network? The question will be asked with growing urgency over the next few months.
A flood of British cable companies is due to arrive on the London stock market this year as their (largely foreign) parents seek to establish book values for their offspring and to guard against any xenophobic regulatory tendancies in a future UK Government.
Floats of minority stakes in American-owned TeleWest, the largest UK cable company, and French-owned General Cable, the seventh largest, are on the cards for June. If they go smoothly, others seem certain to follow.
Since the upfront costs of cabling a franchise area are enormous, no British cable company has yet turned in a profit - nor will they for years to come. But that will not stop TeleWest, which had 1992 revenues of about pounds 20m, attempting to obtain a market valuation of around pounds 1.85bn - a modest turnover multiple of 92 times.
Given that traditional methods of valuation are largely irrelevant, analysts have been scratching around for alternative ways to attach a price to these companies.
Until recently the usual approach was a crude one. Analysts would look at how many homes had been or could be cabled in a company's franchise and attribute a relatively arbitrary value to each.
But the prospect of flotations has inspired much more complex valuation methods. The current favoured solution is to work out their projected earnings before interest, tax, depreciation and amortisation - essentially free cash flow - over the next 10 years or so.
This is then "discounted" - reduced a little - to reflect the fact it will not be earned for some time and then a multiple applied to the end result to achieve a stock market valuation. All of which entails an awful lot of guesswork.
It means assigning numbers to the cost of cabling franchise areas, the rate at which households will take up the offer of having cable television and/or telephone services, subscription rates, programming and telephone connection costs, to mention just a few.
Kleinwort Benson, TeleWest's adviser, has produced a projection that suggests the company will have revenues of pounds 1.3bn and pre-tax profits of pounds 389m - in the year 2004. Applying an exit multiple of 10 times and a 16 per cent discount rate, TeleWest would thus be valued at pounds 1.3bn.
Using a different key variable - say the exit multiple or the discount percentage - makes a huge difference to the valuation. On Kleinwort's figures an exit multiple of 12 and a 14 per cent discount rate would push the value up to pounds 1.9bn.
Since there are virtually no British companies that are comparable investments, analysts have used the multiples that apply to quoted US cable companies.
Some - such as Kleinwort - say that British cable companies are more attractive than their US equivalent since they alone can offer highly profitable telephone services. So, according to Kleinwort, a multiple of 10 times 2004 cash flow, about 25 …