Cable Operators

Analysts: Dolans Moving Toward Buyback

3/31/2006 7:00 PM Eastern

Could Cablevision Systems Corp.'s moves to issue a $3 billion special dividend to shareholders be a way for the ruling Dolan family to launch another bid to take the operator and its cable networks private?

That's what Citigroup cable analyst Jason Bazinet believes, and he issued a report last Monday supporting his claims.

On March 28, Cablevision said in a filing with the Securities and Exchange Commission that it has named two independent board members — Thomas Reifenheiser and Vice Admiral John Ryan USN (Ret.) — to evaluate the dividend proposal and make a recommendation to the board as to whether it should be paid.

Cablevision also said it had entered into a memorandum of understanding to settle a class-action lawsuit brought last year against the company regarding the dividend. According to the suit, some shareholders challenged and sought to enjoin the dividend, claiming that Cablevision, its board of directors and certain members of the Dolan family breached their fiduciary duty to shareholders. The proposed settlement — terms of which were not disclosed — is subject to approval by the court.

BOARD APPROVAL

The Bethpage, N.Y.-based company said earlier this month that its board of directors gave management the green light to pursue the dividend — which would also require approval from the board and any other regulatory bodies. On Feb. 24, Cablevision said it had obtained a new credit facility totaling $2.4 billion, with a provision to access an additional $3.1 billion. The company stated it intends to use $1.3 billion to refinance its existing credit facility and the balance for “general corporate purposes.” Most analysts believe the credit facility will be used to fund the special dividend.

Cablevision's controlling Dolan family launched an effort to take its cable operations private in June for $21 per share. The Rainbow Media Holdings Inc. cable networks would have remained publicly traded. But the Dolans' pulled their offer in October.

Bazinet believes that the dividend is just what the Dolan family — led by chairman Charles Dolan and his son CEO James Dolan — needs to launch another bid to take the company private, this time with the Rainbow networks in tow. According to his report, Bazinet said that the dividend would actually help Cablevision keep its leverage ratio below 9 times cash flow, a key covenant in its existing debt agreements.

Bazinet wrote that the dividend would reduce Cablevision's equity float — the number of outstanding shares times the stock price minus the dividend — and allow the Dolans to spend about $2.8 billion to fund the dividend, or about $570 million less than if they tried to take the company private without the special dividend. Bazinet wrote that the Dolans' could pay a 25% premium to Cablevision's existing share price and still keep leverage below the 9 times threshold, having to borrow about $4.4 billion instead of $7.3 billion.

Bazinet also said in a conference call Monday to discuss the report that the Dolans' have an incentive to launch another effort to take the company private. He said that taking the company private and selling off the Rainbow networks (which he valued at about $4.9 billion) and MSG (valued at $1.7 billion) would create between $3 billion and $3.6 billion of pre-tax value for the family.

“To believe that the special dividend isn't linked to a decision to go private you sort of have to believe that the Dolans' have changed their minds,” Bazinet said on the conference call. “Anytime you're constructing conspiracy theories the conspiracy theory almost by definition has to be simpler than the reality. I think ours is pretty simple: that the Dolans still want to go private, they are just going about this in a different way.”

Bazinet ran his theory past Cablevision the Friday before issuing the report, but it declined to comment.

MALONE EYEING RAINBOW?

Bazinet expects that once the company is taken private, Cablevision would sell its New York metropolitan area cable systems, probably to Time Warner Cable. That operator will have a public currency once it is spun off from Time Warner Inc. following the completion of its acquisition of Adelphia Communications Corp., expected in the second half of the year. Time Warner Cable, which has more than 1 million subscribers in Manhattan alone, has had its eye on the Cablevision properties for years.

Cable legend John Malone's Discovery Holding Co. — which includes Liberty Media Corp.'s 50% interest in Discovery Communications Inc. and 100% stake in Ascent Media Group — could be a possible buyer of the Rainbow cable networks.

Bazinet said that although Malone is prohibited from using DHC as a vehicle to do a major deal for two years after the initial public offering (mainly because of tax reasons), that restriction will be lifted in July 2007.

“Given that he [Malone] wants to buy more cable nets, given that he has a tax-free vehicle to do it, they may be a buyer of those assets as well,” Bazinet said.

Cablevision stock was up 24 cents each to $26.70 per share in 4 p.m. trading March 27. The stock fell back slightly in subsequent trading, closing at $26.40 per share (down 25 cents each) on March 29.

The Cost of Going Private
Citigroup analyst Jason Bazinet worked out how much money the Dolan family would have to borrow to take Cablevision Systems Corp. private without issuing a $3 billion special dividend. Here are his findings:
w/Special Dividend w/o Special Dividend
Public share price, pre-dividend $26.50 $26.50
- Dividend Payment $10.38 $0.00
= Post-dividend public share price $16.12 $26.50
Total shares outstanding (millions) 289 289
- Dolan shares (millions) 69 69
= Public Shares (millions) 220 220
Post-dividend public share price $16.12 $26.50
x Public Share (millions) 220 220
= Public Float (millions) $3,546 $5,830
x Potential premium paid to equity holders 125% 125%
= Take-out equity value (millions) $4,433 $7,288
Source: Company reports, Citigroup estimates

November