'Something Wrong’ With Dolan Offer

10/19/2007 8:00 PM Eastern

The Dolan family’s $10.6 billion quest to take Cablevision Systems private is beginning to look a lot like the track list for CEO Jim Dolan’s 2005 debut album with his classic rock band, JD and the Straight Shot.

That album — Nothing to Hide — featured cuts such as “Slow Motion in Reverse,” “Didn’t Wanna Do It,” and “There’s Something Wrong.”

There appears to be “something wrong” with the Dolans’ proposal, at least in the minds of a quartet of Cablevision’s largest institutional investors, who said they would vote against the deal last Wednesday.

The biggest blow came last week when ClearBridge Advisors, the largest non-Dolan holder of Cablevision stock, said it would vote against the proposal at a scheduled Oct. 24 special shareholders’ meeting to approve the deal. Clearbridge’s 31.4 million shares represent 10.7% of all Cablevision shares and 13.7% of stock held by parties other than the Dolans.

ClearBridge is the fourth large Cablevision shareholder to come out against the going-private deal with less than a week to go before the special meeting. On Oct. 12, Gamco Investors, which owns 8.4% of Cablevision shares held by parties not held by the Dolan family, said in a Securities and Exchange Commission filing that it would vote against the deal.

Other large shareholders, including Marathon Partners — which owns 5.3% of Cablevision stock not held by the Dolans — and T. Rowe Price — which owns 5.7% — also have come out against the deal. Together, the four shareholders possess 33.1% of all minority holders’ shares.

The opposition could kill the Dolans’ efforts to take the New York-area cable operator private; but Jim Dolan, speaking for the family, said the offer will not be changed in advance of Wednesday’s shareholders meeting.

FOUR SCORE: Where Shareholders Stand
Four of the five largest minority holders of shares of Cablevision Systems say they plan to vote Wednesday against the Dolan family’s $36.26 a share offer to buy them out and take the company private. The Dolans have said if a majority of minority holders oppose the deal, the bid will be blocked.
Company Millions of Shares % of Shares % of Non-Dolan Shares For/Against Dolan Offer
SOURCE: Citigroup and Bloomberg research
ClearBridge Advisors 31.4 10.7% 13.7% Against
Gamco Investors 19.2 6.5% 8.4% Against
T. Rowe Price 13.1 4.4% 5.7% Against
Marathon Partners 12.2 4.1% 5.3% Against
JP Morgan 6.5 2.2% 2.8% Not stated


“At the proposed offering price, ClearBridge Advisors does not feel that the shareholders are being adequately compensated for the expected growth in Cablevision’s free cash flow … nor the value of the other assets owned by the company,” ClearBridge said in a statement.

That statement came a day after Jim Dolan issued his own terse response to criticism from other shareholders who have said publicly that the Dolans are trying to low-ball them.

“On behalf of my parents, brothers and sisters, I want to state emphatically that there will be no modification of the family’s accepted offer to acquire Cablevision,” Jim Dolan said in the statement. “We are looking forward to next week’s vote and hope that the transaction is approved, but I’d underscore that I am completely prepared to continue to lead the company into the future as a public company if the transaction is not approved.”

Combined, the four funds own about 26% of Cablevision’s Class A common stock, including the Dolans’ holdings, and 33.1% of non-Dolan shares. Although the Dolan family controls about 74% of Cablevision’s voting shares, they own less than 25% of the company’s Class A common stock. The family has said in offering documents that they would require a majority of the minority of Class A shareholders to approve the deal.

While that could mean that even without the support of the four funds, the Dolans could still push through their privatization plans, it has some analysts speculating that the deal could be dead in the water.

Adding to the uncertainty was the Oct. 12 recommendation to reject the deal from ISS Governance Services, which advises institutional investors.

In a research note, Pali Research media analyst Richard Greenfield wrote that without ClearBridge’s support, “there is virtually no hope for the Dolan offer to succeed.” Greenfield also slapped a “buy” rating on the stock.

Greenfield added in his report that there is a possibility that the Dolans could postpone the Oct. 24 meeting, possibly until Cablevision releases its third-quarter results sometime in November.

“Given that the special committee has been 'talking down’ [Cablevision] cable earnings ('talking up’ non-cable), we would not be surprised to see the Dolan family delay the shareholder vote until after they report [third-quarter] earnings (as well as reporting season for their cable industry peers, which is not expected to be terribly exciting),” Greenfield wrote.

The main shareholder objection appears to be the price, but there also appears to be opposition to the possibility that shareholders would be left out of a potential sale of the cable assets in the future. In a blog post on the Gamco Web site after Jim Dolan’s Oct. 17 statement, Gamco chairman Mario Gabelli said as much.


“Jimmy, my clients are not looking for — in Wall Street jargon — 'a kiss from you.’ Since the sale of [Cablevision] was not and will not be shopped, we want a piece of the back end,” Gabelli wrote.

Gabelli has been one of the more vocal opponents of the Dolan proposal, and has said publicly in the past that he believes Cablevision is worth as much as $50 per share, far higher than the Dolans’ $36.26 per share offer.

Adding to the complexity of the offer is that shareholders can block the transaction with less than a majority of the minority vote.

According to the offering documents, the Dolans have stated that if more than 10% of the minority holders “dissent,” the deal is off.

Citigroup media analyst Jason Bazinet wrote in a research report that dissenting shareholders would be those that opt to exercise their appraisal rights on their stock. That would mean hiring a third-party appraiser to value their shares and could result in those shareholders receiving more than the $36.26 per share the Dolans have offered.

So far, only one shareholder — Gamco — has indicated that it is considering exercising its appraisal rights.

In his report, Bazinet said that in its current form, the Dolan proposal has a 35% chance of passing muster.

But shareholders who oppose the deal also run the risk of seeing the value of their stock decline precipitously. Cablevision shares have been on a solid run since the Dolans took the cover off their offer in May — the stock reached as high as $38.30 per share in July — but that was mainly because of the privatization offer. With a Dolan deal off the table, Greenfield and other analysts believe the stock will retreat to the low $30-per-share range. That could be incentive enough for other shareholders to sign off on the deal.