Dolan: Bresnan No Signal to Bigger Deals

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While investors continued to digest the somewhat surprising announcement that Cablevision Systems will acquire Bresnan Communications for nearly $1.4 billion, Cablevision CEO James Dolan said that the deal is not a precursor to more transactions for the cable company.
On Monday Cablevision said it had won the auction for Bresnan, agreeing to pay $1.365 billion for its more than 300,000 subscribers in Colorado, Wyoming, Montana and Utah. The deal comes after Cablevision's stock took a beating last week when it was leaked that the company was a bidder for Bresnan.
On a conference call with analysts to discuss the transaction, Cablevision CEO James Dolan said that the Bresnan deal is a big opportunity for growth, but investors shouldn't think the Bethpage, N.Y.-based MSO is on the hunt for systems
"This should not be taken as a signal that we are in the market for every cable company or cable system that may eventually be for sale," Dolan said on the call.
Cablevision chief operating officer Tom Rutledge, who will be taking over operation of the Bresnan systems once the deal closes, said that although the properties are extremely well run, there is room for upside. Rutledge said that video penetration for the systems is about 48%, with digital penetration at 65%, high-speed data penetration at 38% and voice penetration at 22%. He added that Cablevision's New York area properties generate about $450 in cash flow per home annually, while Bresnan generates about $250 per home.
That $200 difference isn't simply because of higher monthly rates - both companies have similar monthly charges.
"The opportunity is not in rate increases, it is in growing the amount of services to all potential customers in these communities, as well as adding new services to existing subscribers," Rutledge said on the call.
Cablevision will be financed through $1 billion in debt from BofA Merrill Lynch and Citigroup. Cablevision's equity investment will be less than $400 million. The transaction is expected to close in late 2010 or early 2011.

Cablevision also stands to reap a substantial tax benefit from the deal. On the conference call, Cablevision chief financial officer Michael Huseby noted that by structuring the deal as an asset purchase, Cablevision's equity investment will be nearly offset by the net present value of the tax amortization and depreciation benefits.
"While the deal was not done for tax purposes, it obviously gives us a substantial tax benefit going forward, which is a nice aspect of this deal for us," Huseby said on the call.
Investors, which last week pounded Cablevision stock when it was said to be among the Bresnan bidders (the stock fell as much as 6% last Wednesday), was up more than 9% ($2.27 each) in early trading Monday. The shares closed at $24.57 on June 14, up 5%, or $1.17 each.
Softening the blow is a $500 million share buyback program that was seen as encouraging by some investors. But at least initially, analysts did not share the same enthusiasm for the deal.
"This is not what investors had in mind," wrote Sanford Bernstein cable and satellite analyst Craig Moffett in a research note. Moffett estimated that the $1.365 billion price tag for the systems represented an 8.3 times multiple of Bresnan's cash flow. On the positive side, Moffett wrote that the deal highlights the differential between public and private cable valuations - he estimated that Cablevision is trading at about 6.3 times cash flow.
On the down side, Moffett said that while investors should welcome the buy-back, the will be "frustrated by the decision to buy Bresnan at 8.3 [times] instead of acquiring more of Cablevision itself at 6.3 [times]."
Citigroup acted as lead financial adviser to Cablevision, with BofA Merrill Lynch and Guggenheim Securities providing financial advice. Sullivan & Cromell acted as Cablevision's legal counsel.
Cablevision said on the conference call that it has purchased 100% of Bresnan's equity - including majority holder Providence Equity Partners and Comcast, which has a 30% interest in Bresnan.
UBS Investment Bank and Credit Suisse Group served as financial advisers to Bresnan and Providence Equity and Weil, Gotshal & Manges LLP and Holland & Hart LLP served as legal advisors.
While analysts puzzled over Cablevision's logic behind buying a cluster of systems clear across the country - many believed Charter Communications' New England systems would be a better fit - it does jibe with Dolan's strategy to expand outside its New York centric footprint.
In May, Dolan said in an interview with Multichannel News that the company was looking for properties where it could apply its unique management and operating style.

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