Cablevision Worth Twice Dolans’ Offer?
Analyst: Cash Flow Will More Than Double by 2011
By Mike Farrell -- Multichannel News, 7/8/2007 8:00:00 PM
Cablevision Systems’ ruling Dolan family played hardball with a special committee of independent directors in its latest $10.6 billion proposal to take the cable company private, according to a Securities and Exchange Commission filing June 28.
But Cablevision’s own projections for its growth over the next four years could give added fuel to critics who believe the latest offer is too low.
Cablevision could be worth as much as twice the Dolans’ $36.26-per-share offer, according to Sanford Bernstein cable and satellite analyst Craig Moffett. He projects the company’s free cash flow will more than double between 2006 and 2011, while capital expenditures will fall to all-time lows.
In a report July 2, Moffett wrote that within four years, capital spending is expected to drop below 8% of revenue at the cable operations. At the consolidated level — including its Rainbow Media Holdings programming division and its Madison Square Garden unit — capital expenditures are expected to fall below 6% of revenue in 2010, “a level last seen in … well, never,” Moffett wrote.
| 2007E | 2008E | 2009E | 2010E | 2011E | |
| Source: Cablevision proxy statement | |||||
| Revenue | $6.8 billion | $7.5 billion | $8.3 billion | $9.0 billion | $9.7 billion |
| Adjusted operating cash flow | $2.2 billion | $2.5 billion | $2.8 billion | $3.2 billion | $3.5 billion |
| Free cash flow | $1.1 billion | $1.7 billion | $2.1 billion | $2.56 billion | $2.62 billion |
| Capital expenditures | $807 million | $708 million | $621 million | $588 million | $811 million |
According to the proxy statement, adjusted operating cash flow at the cable unit is expected to rise to $1.9 billion in 2007 (up 18.7% from 2006) and to $2.7 billion in 2011. At the same time, capital spending will drop from $679 million in 2007 to $533 million in 2011.
That will translate into a huge increase in free cash flow — cash flow after interest payments and capital expenditures are made — at the cable systems, from $1.1 billion in 2007 to $2.1 billion in 2011, noted Moffett.
“We believe the case can be made, on the basis of last week’s proxy, that the shares are worth at least twice the current offering price,” Moffett wrote in a follow-up report July 5.
Investors appeared to take Moffett’s report to heart, sending Cablevision stock up by more than 3% ($1.30 each) last Thursday to $37.73 per share. That price, already above the Dolan’s offer of $36.26 per share, is the highest level Cablevision shares have reached in about five years and casts further doubt on whether shareholders will sign off on the deal.
The Dolan family had restarted negotiations with the special committee — independent directors Thomas Reifenheiser and John Ryan — shortly after the two had rejected the family’s second going-private offer (for $30 per share) as too low on Jan. 16, according to the proxy.
In early March, Cablevision founder and chairman Charles Dolan discussed with members of the company’s board of directors several financial options, including issuing another special cash dividend to shareholders — Cablevision issued a $10-per-share special dividend in 2006 after its second proposal failed — and a possible stock buyback. By mid-March, the Dolan family, including Cablevision CEO James Dolan, generally discussed with the board its continued interest in pursuing a going-private transaction.
In early April, after meeting with lawyers and financial advisers said that they would not consider a proposal that was not in excess of $33 per share. Later, after presentations by the family regarding Cablevision’s operating performance, its performance relative to its peers in the cable industry and analysts’ projections, the special committee said that it would only consider an offer in excess of $36 per share.
After several days of back and forth negotiations, the Dolan family agreed in the early hours of May 2 to increase their offer to $36.26 per share.
But the special committee, after consulting with its advisers, made a counteroffer of $36.50 per share. It was then that the family appeared to put its foot down, and more importantly, the special committee appeared to listen.
“The Dolans responded by reiterating their position that they would not increase the offer price in excess of $36.26 per share under any circumstances and that, if a deal were not reached that morning, they would rescind their proposal and negotiations would terminate,” the proxy stated.
After reviewing the proposal again and consulting with their advisers, the special committee determined that the $36.26 per share proposal was fair to shareholders. The deal was announced later that day.
Although the special committee has approved the deal — which values the cable operations at about $5,340 per subscriber — a “majority of the minority” of shareholders not affiliated with the Dolan family still need to sign off on the deal at a special meeting of shareholders. The proxy statement did not specify a date for that special meeting.
