News

Street Eyes Cablevision Asset Sales

7/21/2002 8:00 PM Eastern

Cablevision Systems Corp. has started negotiations with News Corp. regarding unwinding its partnerships in five regional sports networks, according to published reports.

The negotiations were sparked by News Corp.'s option to "put" its interests in the networks back to Cablevision, effective in December. Cablevision, faced with a $550-million funding gap in 2003, would be hard-pressed to pay cash for News Corp.'s interest in the networks, estimated to be worth about $1 billion.

According to reports, Cablevision is negotiating to sell its interest in the regional sports networks to News. But the Bethpage, N.Y.-based MSO has several options.

NET SWAPS

According to some sources, it is likely that Cablevision would agree to part with the regional sports networks — in Ohio, New England, Florida, Chicago and San Francisco — in exchange for News Corp.'s 40 percent stake in the Madison Square Garden arena and the Madison Square Garden Network regional sports channel.

But what could throw a wrench into the negotiations is Cablevision's structure regarding the sports networks. Several are contained in subsidiaries of Cablevision or in Rainbow Media Group Inc., a separate tracking stock that also includes American Movie Classics, WE: Women's Entertainment, Bravo, Independent Film Channel and MuchMusic USA.

According to some sources, Rainbow is reluctant to give up the sports channels because they help gain system carriage for its other networks. Cablevision declined comment.

BYE, BYE WIZ?

News of the negotiations come as analysts speculate that Cablevision could shutter its The Wiz electronics stores and its direct-broadcast satellite venture to help close a $550 million funding gap in 2003.

Cablevision first addressed the funding gap issue in October, but limited its comments to statements that it's investigating its options. Among those alternatives: reducing its capital expenditures, issuing new stock or debt or selling assets.

It has been that silence — coupled with the overall skittishness in the stock market, in light of the Adelphia Communications Corp. accounting scandal — that has pummeled Cablevision's stock. Shares have plunged 80 percent since the beginning of the year, from $48.01 each to $9.30 on July 16.

But that silence may end soon, as Cablevision is scheduled to release its second-quarter earnings on August 8. CS First Boston cable analyst Lara Warner expects that Cablevision will provide that much anticipated clarity on or before that date.

"Cablevision has a limited amount of time in which to resolve the problem," Warner said. "Our calculations suggest they need money in the very beginning of 2003.

"We do actually think the management team is now willing to address some of the operational issues within the business, not just selling assets to close any funding requirements."

Warner said in the long-term, that is much healthier for the stock.

"The concern we had if they just solved the funding gap by selling an asset, you leave operationally inefficient businesses up and running," Warner said.

But given the state of the stock market and the overall business climate, Cablevision is being forced to give a hard look to its operations, Warner added. It's expected to make some tough decisions regarding capital expenditures, headcount and non-strategic assets.

There was much speculation about Cablevision to begin with, but the rumor mill heated up after Warner issued a report on July 15, upgrading the stock to "buy" from "hold." In her report, Warner said that it was highly likely that Cablevision would provide some long awaited details on the funding gap, which she estimated at about $550 million.

SOME SCENARIOS

Possible scenarios in Warner's report include closing or divesting The Wiz, selling off its Clearview Cinemas chain of movie theaters, or shutting down or selling a DBS venture in which the company has already invested $140 million this year alone.

Selling off its Personal Communications Services (PCS) wireless telephony licenses — long thought by most analysts to be a logical choice to close the perceived 2003 deficit — is less likely, Warner wrote. Given the decline in value of telecom assets recently, Warner said the PCS licenses, once worth between $1.5 billion and $2.5 billion, are now worth about $538 million.

Warner said that the most likely candidates for sale or closure are The Wiz, Clearview and Rainbow N.Y., which includes Cablevision's local news networks and the MetroChannels.

Although The Wiz and Clearview have been chronic underperformers — the electronics chain has accumulated nearly $198 million in operating cash flow deficits since 1998 alone — Rainbow N.Y. is a more surprising candidate.

Although Warner wrote in her report that Rainbow N.Y. does add value to the cable business, it is at a "cost too high for the company to bear."

She estimated that shutting down those three businesses could yield Cablevision a $170 million benefit and as importantly, boost its credibility with investors.

A 5.5 percent reduction in head count would yield about $200 million in incremental cash flow, she added. The MSO also could push out about $250 million in capital spending on network upgrades to 2004 and eliminate about $100 million in capex altogether.

DBS SHIFT SEEN

Regarding the DBS plans, Warner said that although Cablevision has committed a large amount of money to the venture already, it may be able to recoup at least some of that.

Earlier this year, Cablevision said it would put about $140 million toward the construction of a satellite this year. But if the company stops the order by May 2003, it can receive a partial refund.

In Federal Communications Commission and Securities and Exchange Commission filings, Cablevision said it plans to launch a DBS service in 148 cities across the country by March of next year.

"I think it's highly likely that Cablevision changes their tack on continuing to fund the buildout of that satellite," Warner said.

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