Dolans Paying Close to Top Dollar
By Tom Steinert-Threlkeld & Steve Donohue -- Multichannel News, 10/9/2006 1:22:00 PM
Cablevision Systems may have to sweeten its $27-per-share offer to take itself private, Wall Street analysts said Monday.
But it can’t bump up its price very much, according to Matthew Harrigan, cable-industry analyst with Janco Partners in Denver.
The reason: The New York-area cable-systems operator is already heavily in debt and will add $6 billion of additional debt to buy out public shareholders in its attempt to go private.
The company reported $13 billion in total debt at the end of the first quarter in a filing with the Securities and Exchange Commission. Adding $6 billion would push that to approximately $19 billion.
And depending on the growth of its business, that gives Cablevision little wiggle room for sweetening its offer. According to the company’s financial filings, it would violate terms of its existing borrowing agreements if total debt were more than nine times cash flow. Harrigan estimated the amount of cash currently generated by the company’s cable and other operations at $1.8 billion per year.
This means there is almost “no possibility” that the bid would get raised past $29 or $30 per share, he said. And even then, the company could consider selling off AMC, The Independent Film Channel, WE tv and its Rainbow Sports networks “to get a little breathing room,” he added.
An attempt by the Dolan family to take Cablevision private last year failed when independent directors determined that the payout to public shareholders was inadequate.
The Dolans were offering public shareholders $21 per share for their stakes. But that was only for the company’s cable operations. The Dolans valued their bid at the equivalent of $33.50 per share, but the plan included spinning off AMC, sports operations such as MadisonSquareGarden and other moves.
This time, the Dolans are bidding for the entire company. And the price of $27 per share represented about a 13% premium over where Cablevision’s stock closed in public trading Friday. The company’s shares closed the week at $23.93. As recently as April, it closed a week of trading at $18 each.
The $7.9 billion value the Dolans put on the company was in line with those of other major cable-system operators, said Craig E. Moffett, cable analyst with Sanford C. Bernstein in New York. The $27 per share is equivalent to 8.3 times what he estimated Cablevision’s 2007 cash flow to be. Comcast shares currently trade at about 7.7 times its cash flow, and Mediacom Communications is at 8.3 times, he added.
“The independent board did the shareholders a great service the last time by rejecting” the Dolans’ 2005 bid to take Cablevision private, said Aryeh Bourkoff, cable analyst at UBS Warburg.
The Dolans, in a letter to the company’s board of directors, noted that the $27-per-share offer price was “14.9% higher than the 2005 proposal” when adjusted for a $10-per-share dividend paid in April of this year. The family noted that the value of Cablevision shares increased 31.9% since that dividend was issued.
This year, the operating environment for Cablevision has changed, as well. Where investors in summer 2005 were skittish about the prospects of cable companies in general, they are now much more confident about their ability to not just fend off but take business away from telephone and satellite companies.
Cablevision said in July that it signed up its 1 millionth telephone subscriber, which means that one-third of its TV customers are also voice customers.
Its results reflect its success both in voice and Internet services. Its cash flow in the second quarter hit $533.1 million on revenue of $1.4 billion, up from $336.3 million generated one year ago on revenue of $1.2 billion, according to ComStock data services.
Going private would allow the Dolan family, which controls Cablevision, to spend more aggressively on adding bandwidth or technical features to its cable system, including innovations like its proposed inside-the-network recording of TV shows for its subscribers.
Being private would also shield the Dolans from the eyes of public watchdogs, such as the Securities and Exchange Commission or accounting groups. Last month, Cablevision found itself in hot water when it disclosed that it had issued options to purchase shares of its stock to one of its executives (former vice chairman Marc Lustgarten) after he had died.
“The company is facing increasing scrutiny with respect to its options investigation, and it also has an impending competitive environment, which is intensifying, with Verizon [Communications],” Bourkoff said.
Roughly four-fifths of the MSO’s 3.1 million cable-TV subscribers are in telephone territories served by Verizon, which is building a high-capacity all-fiber network to compete with Cablevision in communities around the New York metropolitan area, such as Long Island’s Hempstead and Massapequa Park.
The timing is also propitious because companies that might want to buy out the Dolans if they were to put the company up for sale are not likely to make any moves right now. Time Warner, under pressure to increase the value of the stock held by its holders, is planning to turn Time Warner Cable into a publicly traded stock.
While Time Warner Cable has long sought to combine Cablevision’s cable operations with its New York-area systems, Oppenheimer analyst Tom Eagan said he doesn’t expect the Dolans’ bid to take its company private to prompt Time Warner to make a bid for Cablevision.
“I don’t expect Time Warner to do anything in the near- to medium-term,” Eagan said. “I don’t think they’ll amend that [initial public offering of stock] to the public at this point.”
The only cable operator larger than Time Warner is Comcast, which is not expected to waste motion with a hostile-takeover attempt -- not when Charles, Jim and the Dolan family control 74% of the votes on any issues involving Cablevision, and when they said, in the letter to the company’s board, that they had no intention at present to sell shares in the company; just to buy them.
The only potential hitch in the Dolans’ plan is, again, a special committee of independent directors who must render an opinion on whether the Dolans’ offer does indeed represent fair value for the company’s public shareholders.
If the committee goes along, the company could go private at the outset of 2007, Wall Street analysts figured Monday morning.
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