Cable Operators

Dolans Pull Back: Prelude to a Selloff?

10/28/2005 8:00 PM Eastern

Cablevision Systems Corp.’s ruling Dolan family pulled the plug on plans to take the Bethpage, N.Y.-based operator private last week, a move that some analysts believe could mean that its assets are once again in play.

The Dolans, led by Cablevision chairman Charles Dolan and his son, CEO James Dolan, had proposed purchasing the 80% of company stock the family did not own in a $7.9 billion cash and stock deal in June. According to that proposal, the Dolans would pay Cablevision stockholders $21 per share in cash and $12.50 in Rainbow Media Holdings stock. Rainbow was slated to be spun off as a separate publicly traded company after the deal was finalized.

On Second Thought …
Below are a few recent examples of how Cablevision’s ruling Dolan family has almost made a sport of changing its minds about separating cable systems and programming assets:
SOURCE:Multichannel News research
March 2001: Cablevision spins off Rainbow Media Holdings as a tracking stock, creating Rainbow Media Group: AMC, WE: Women’s Entertainment Television, Bravo (since sold to NBC), Independent Film Channel, MuchMusic USA (now Fuse) and interests in five regional sports networks.
August 2002: Cablevision decides to bring Rainbow Media Group back into the fold.
April 2004: Cablevision proposes splitting into two publicly traded companies — Cablevision Systems comprising its cable operations, professional sports teams and regional sports networks; and Rainbow Media Enterprises, consisting of AMC, IFC, WE: Women’s Entertainment and several VOD networks and its fledgling Rainbow DBS (Voom) HDTV-centric satellite service
December 2004: Cablevision announces that it will suspend the RME spinoff. Later, it announces that it has sold Rainbow DBS’s satellite to EchoStar for $200 million. Voom’s 21 original HD channels, not part of the EchoStar deal, remain within Rainbow.
June 2005: The Dolan family proposes buying the 80% interest in Cablevision it doesn’t already own for $7.9 billion, taking the cable systems private; Rainbow Media will be spun off as a separate publicly traded company.
October 2005: The Dolan family withdraws its offer and recommends Cablevision issue a $3 billion dividend to shareholders.

THIRD TIME AROUND

This is the third time in about three years that the Dolans have scrapped plans to split up the company (see chart).

Negotiations with a special transaction committee of independent Cablevision directors began in July. But Charles and James Dolan sent a letter to Cablevision’s board on Oct. 24 — filed with the Securities and Exchange Commission Oct. 25 — stating that negotiations had reached a standstill over the buyout’s ultimate price.

“It has become clear that we will be unable to reach agreement with the special transaction committee on the terms of our proposal, despite good-faith negotiations over the past four months,” the Dolans wrote. “During this period, we have witnessed a decline in communications-sector valuations and an increased competitive environment.”

Some analysts believe that scrapping the deal will spur other suitors to look at Rainbow Media, comprising national cable networks AMC, WE: Women’s Entertainment, the Independent Film Channel and music channel Fuse. Analysts have estimated Rainbow’s value at about $4 billion, with the bulk attributed to AMC.

Oppenheimer & Co. cable and satellite analyst Tom Eagan predicts that in six to nine months, other programmers like Liberty Media Corp., The Walt Disney Co., Viacom Inc. and private-equity players will begin to make bids for the programming assets.

In a research report, Eagan wrote that consolidation in the sector — Viacom’s plans to split into separate cable and broadcast companies by year-end; Disney’s possible plans to divest of radio stations; and Liberty’s recent restructuring moves involving its international cable holdings and the spinning of Ascent Media Group Inc. and its 50% stake in Discovery Communications into Discovery Holding Co. — could fuel a desire to beef up content portfolios.

Eagan wrote that Viacom could prove to be the better fit: Its Sundance Channel could mesh with IFC, while AMC would give it a movie channel on the basic tier.

Fuse has been said to be the target of Hollywood moguls Bob and Harvey Weinstein, who formed Weinstein Bros. after they left Miramax earlier this year. According to Broadcasting & Cable, a sister publication to Multichannel News, the Weinsteins are willing to spend upwards of $450 million for Fuse, which they would use as a vehicle for lifestyle shows and movies. That would be a significant premium for the 38 million-subscriber network — Eagan values Fuse at about $200 million.

SYSTEM SUITORS

Meanwhile, Fulcrum Global Partners media analyst Richard Greenfield believes that Cablevision’s 3 million New York metro area subscribers could also be in play.

Greenfield estimated that the cable assets will generate about $1.55 billion in cash flow in 2006. Applying an eight times multiple would value the cable operations at about $12.4 billion, or $4,100 per subscriber.

Time Warner Cable, slated to be spun off as a separate publicly traded company from parent Time Warner Inc. early next year, is thought to be the most logical buyer for Cablevision. And though Time Warner Cable has long expressed an interest in buying Cablevision — it has never been able to agree with the Dolans on a price — it isn’t the only possible suitor, Greenfield said in a research note. Comcast Corp., which has about 720,000 subscribers in the New York and New Jersey area, could also be interested.

“If Cablevision were actually 'for sale,’ we believe Comcast would be a very interested buyer, even if it meant shedding other cable assets (due to regulatory issues),” Greenfield wrote.

Most analysts had expected the Dolans to sweeten their offer to take Cablevision private by as much as $2 to $3 more in cash per share, which would have added as much as another $700 million to the price. The Dolans have said in the past that they would fund the buyout through a mixture of bonds and bank debt.

That may have been too much for the Dolans to bear. According to Eagan, offering $23.50 in cash per share would push the MSO’s leverage from 8.2 times 2006 estimated cash flow to 8.65 times.

“That’s nearing the Charter range,” Eagan said, citing Charter Communications Inc., the most heavily leveraged operator, at about 9 times 2005 estimated cash flow.

FAMILY DIVIDEND

The Dolans also proposed that Cablevision issue a $3 billion special one-time dividend to shareholders — including the Dolans — “driven by a desire to treat all shareholders equally, to provide clarity for the company’s security holders and to take advantage of the robust credit markets and attractive interest rate environment.”

Cablevision said in a statement that it is considering the Dolans’ recommendations and has not made a decision on the dividend as of yet.

Most analysts believe Cablevision’s board will decide against the dividend, mainly because the cash for it would have to come from additional borrowings.

The biggest beneficiary of the dividend would be the Dolan family themselves. Greenfield estimated that a $3 billion dividend would work out to about $10.40 per share. With the Dolans owning about 68.8 million shares of stock, that would mean a $715 million windfall for the family.

Cablevision stock took a beating after the announcement, closing at $24.26 per share on Oct. 25, down $3.54 each or about 13%. The stock rebounded slightly on Oct. 26, closing at $25 per share, up 74 cents each.

September