Cablevision PCS Sale Adds Breathing Room

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Cablevision Systems Corp. last week agreed to sell its personal communications service wireless-telephone licenses for $750 million, a deal that could help the company in unrelated negotiations with News Corp. over its regional sports networks.

The Bethpage, N.Y.-based company announced last Thursday that it would sell its PCS spectrum — about 50 licenses that reach from New York City to Maine owned by subsidiary Northcoast Communications LLC — to Verizon Wireless for about $750 million.

The deal comes in at the high end of the $500 million to $750 million range in which many analysts had valued those assets.

The licenses cover major metropolitan markets on the East Coast and in the Midwest, including New York City; Boston; Minneapolis; Columbus, Ohio; Providence, R.I.; Rochester, N.Y.; and Hartford, Conn.

Bear Stearns & Co. and J.P. Morgan Chase were financial advisers to Northcoast.

Cablevision, which owns a 49.9 percent equity stake and a 90 percent economic interest in Northcoast, said approximately $60 million of the proceeds will be used to pay Northcoast's debt to the Federal Communications Commission. Cablevision's cut — about $635 million — will be used to pay down bank debt, the company said.

The deal is expected to close by the second quarter of 2003.

"As part of our growth plan, we continue to deliver on our commitment to maximize the value of our non-core assets," Cablevision CEO James Dolan said in a statement. "Northcoast Communications has proven to be an excellent investment for Cablevision. We still believe that there is huge potential in wireless and expect that the use of these licenses will be very fruitful for Verizon Wireless."

Cablevision bought the PCS licenses in 1996 for about $2 per point-of-presence, or about $117 million. In Securities and Exchange Commission filings, Cablevision said it has invested another $217 million in the company.

The sale was good news to analysts, most of who had been pushing Cablevision to sell off the spectrum for months.

"I'm supportive of the company selling an asset that doesn't generate cash flow," said UBS Warburg cable debt and equity analyst Aryeh Bourkoff.

While $750 million is a good price, given the sluggish telecom market, analysts also pointed out that if Cablevision had sold the licenses two years ago — when many were calling for such a sale — it could have reaped as much as $2 billion.

This is the second major asset sale for Cablevision in less than a month. The MSO closed on the $1.25 billion sale of the Bravo cable network to General Electric Corp.'s NBC unit on Dec. 9. This latest sale, some analysts said, signals that Cablevision may be willing to sell more nonstrategic properties.

What's next?

Cablevision in August had already started a major restructuring effort, intended to cut costs and shore up its operations. It included plans to lay off 2,400 employees, close 26 of its 43 The Wiz electronics stores and put its Clearview Cinemas movie-theater properties up for sale.

"The question is, which assets do they sell now?" said SunTrust Robinson Humphrey cable analyst Gary Farber. "This [the Verizon sale] is good news. Six months ago they [Cablevision] had their backs against the wall."

Speculation is that Cablevision could sell the AMC cable channel (formerly American Movie Classics), as well as its direct-broadcast satellite spectrum. Analysts value AMC at between $2 billion and $2.4 billion. The DBS spectrum is worth about $225 million, analysts said.

At the UBS Warburg Media Conference in New York earlier this month, Metro-Goldwyn-Mayer Inc. chairman Alex Yemenidjian said AMC — in which the film studio already holds a 20 percent stake — would be a "perfect fit." But analysts don't expect a sale anytime soon.

The DBS spectrum is a little trickier. Cablevision has said it wants to use its 11 satellite slots to launch its own satellite service, which could cost as much as $2 billion. Those slots are currently leased to EchoStar Communications Corp., which could be a possible buyer.

Another possibility: A sale of the slots to News Corp., which is expected to make a run at the No. 1 DBS provider, DirecTV Inc.

The Verizon deal also could give Cablevision more negotiating leverage with News Corp's Fox Entertainment Group, which has "put" rights for its interests in five regional sports networks outside the New York metropolitan area.

Fox can put its interest in the five networks — Fox Sports Ohio, Fox Sports Bay Area, Fox Sports Chicago, Fox Sports Florida and Fox Sports New England — to Cablevision between Dec. 18 and Jan. 18.

Most analysts value the Fox interest in the sports channels at about $990 million. As part of the agreement, Cablevision can either buy Fox's stake for cash, issue a three-year bullet note (an interest-only bond with principal due at maturity), or start an initial public offering for the networks. Both parties also have the option of doing nothing, although many analysts believe that scenario is unlikely.

Cablevision and News also have another option: Swapping Fox's 40 percent interest in Madison Square Garden Inc. — comprised of the Madison Square Garden arena, Madison Square Garden Network and Fox Sports New York, three professional sports teams (the New York Knicks, New York Rangers and New York Liberty), the MetroChannels and Radio City Music Hall — for full control of the regional sports networks outside of New York.

Although Cablevision is clearly in a better financial position with the recent asset sales, many analyst believe it is unlikely that News Corp. would let its "put" window expire without taking any action. If the company does not exercise its put before Jan. 18, it won't have another chance until 2005.

An asset swap also makes sense because the regional networks don't appear to fit in with Cablevision's New York-centric strategy. The MSO has about 3 million cable subscribers in the New York metro area.

$150M Value gap

One obstacle to that scenario is the disparity in value between the MSG stake and the regional stake. Analysts estimate that Fox's 40 percent of the New York sports assets is worth about $150 million to $200 million more than Cablevision's interest in the regional networks.

The Verizon deal could give Cablevision that needed cash.

So far, however, both Cablevision and Fox have hinted that the partnership will remain as is.

Fox Networks Group president and CEO Tony Vinciquerra, speaking at the recent UBS Warburg conference in New York, said allowing the partnership to stand is a viable option.

"Our business with Cablevision is a pretty good business as it is today," Vinciquerra
said at the conference.

At the same conference, Cablevision vice chairman William Bell said the two parties are negotiating, but if the put were exercised, Cablevision would likely issue the bullet note or launch an IPO.

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