Cable Operators

Cablevision’s Garden Party

5/10/2009 3:00 AM Eastern

In what has become a sort of tradition during quarterly conference calls, Cablevision Systems teased the investment community with another potential bombshell last Thursday: the spinoff of its Madison Square Garden assets.

Cablevision’s ruling Dolan family didn’t offer any details — in typical cryptic fashion, the revelation was a one-liner in the press release announcing its first-quarter financial results. But that line — “The board of directors of Cablevision has authorized company’s management to explore the spinoff of its Madison Square Garden business” — sent the stock soaring and analysts’ tongues wagging.

Cablevision shares climbed as high as 18% ($3.25 per share) to $21.58 each last Thursday, but settled down to close at $19.15 per share, up 82 cents (4.5%) each.

The MSG speculation overshadowed strong first-quarter results — consolidated revenue rose 10.6% to $1.9 billion and consolidated adjusted operating cash flow of $590 million (up 14.3%) in the first quarter. The cable operations lost 6,300 basic-video customers, but gained 9,400 digital video subscribers, 29,800 high-speed Internet customers and 51,400 telephone customers. Cablevision ended the quarter with 41% digital phone penetration of homes passed, more than double that of its peers.

At MSG, revenue rose 2% to $271.3 million and adjusted operating cash flow was $15.9 million, compared to an average operating cash-flow deficit of $2.5 million last year.

The company has on occasion used the quarterly earnings venue to tantalize investors with potential blockbusters that don’t always come to fruition. For example, during its second quarter conference call in July, Cablevision said it was investigating ways to close the valuation gap in its stock, which most observers read as a possible sale of its Rainbow Media programming assets. On its fourth-quarter conference call in February 2008, after it was revealed the company purchased the Chicago Theater and CEO James Dolan said he would not rule out other venue acquisitions, it touched off speculation that Cablevision would buy heavily into concert promotion companies. Neither became a reality.

On a conference call with analysts to discuss first-quarter financial results last week, Cablevision said it would not comment on a possible MSG transaction.

“The operative word is 'explore,’ ” said executive vice president Gregg Siebert on the conference call. “We will look at all situations in a potential spin.”

But guessing what Cablevision and its ruling Dolan family will do next has been a popular parlor game for analysts and pundits for years, and last week was no different.

In a research note Thursday, Sanford Bernstein cable and satellite analyst Craig Moffett speculated that the spin could unlock tremendous value — the unit includes the Madison Square Garden arena; the MSG and MSG Plus regional sports channels; sports teams the New York Knicks, New York Rangers and New York Liberty; Radio City Music Hall; the Chicago Theater; the Beacon Theater and cable music channel Fuse.

“But the dream is perhaps the inverse reading … that spinning off MSG might alternatively be viewed as spinning off everything else,” Moffett wrote.

The possible sale of Cablevision has been bandied about for more than a decade, and has yet to come to become reality. But some analysts argue that with chairman Charles Dolan’s advancing age (he is 82, according to the last proxy statement) and James Dolan’s desire to run the sports properties, now is as good a time as any to sell.

Miller Tabak media analyst David Joyce didn’t speculate on the ultimate goal of the spin initially, but he said the MSG assets could be worth as much as $1.5 billion.