Dolans Disappoint


Faced with a huge funding shortfall in 2003, Cablevision Systems Corp. invited investors and analysts to a New York hotel ballroom last Thursday to talk about a lot more than just the second quarter's results.

While Cablevision's top guns, chairman Charles Dolan and CEO James Dolan, did lay out a plan they said would address funding needs, they didn't provide the bold stroke many investors had hoped for. As a result, the stock tanked, downgrades followed and variations on the verb "disappoint" turned up in several analysts' reports the next day.

Some critics were even harsher. "The meeting was relatively close to a disaster," said fund manager Salvatore Muoio, who heads up SM Investors, an investor in Cablevision. "I thought that they would lay things out in more depth without having to read between the lines."

For instance, instead of declaring that Cablevision would put one or all of its Rainbow Media Group programming assets on the block, the Dolans, acknowledging a new era of austerity, handed out a laundry list of cutbacks. They included:

  • Paring the company's workforce by 7 percent, or about 1,500 employees;
  • Cutting capital expenditures about 35 to 45 percent below 2002 levels, to between $550 million and $650 million;
  • "Substantially" reworking its set-top box purchase agreement with Sony Corp. and announcing its intent to buy boxes from multiple vendors;
  • Trying to sell off its Clearview Cinema movie theater chain;
  • Shutting 26 unprofitable The Wiz electronics stores;
  • And shelving a planned New York City pilot launch of a wireless phone service and possibly selling that operating unit—Northcoast Communications—or finding it a strategic partner.


Not on the sale block: Cablevision's direct-broadcast satellite venture, in which the company has already invested about $140 million this year. James Dolan said he still believes in that venture "is worth investing in."

But he gave little guidance as to how much more Cablevision was willing to invest. He said he had reviewed plans that required spending as much as $2 billion or as little as $500 million, without committing to either sum.

"Say something about the venture," Muoio said. "Say that you think it has huge potential, that you don't plan on financing it yourself, that you're going to look for a partner, or that you're going to shut it down. Instead they said nothing. How can you say nothing?"

The consensus from most analysts: Cablevision dropped the ball, squandering a chance to clarify issues that have weighted its stock, which is down 86 percent this year.

"It was very disappointing," UBS Warburg cable analyst Aryeh Bourkoff said. "I don't think that the company clarified its operational expectations and progress as much as they could have for 2003.

"I continue to think the company has to make progress on selling some of these non-core assets, rather than just highlighting that they're for sale."


Moody's Investors Service vice president and senior analyst Russell Solomon was even less impressed. Moody's downgraded Cablevision's debt two notches last Thursday, adding to the MSO's borrowing costs, and said the cutbacks weren't enough to bridge the funding gap.

"We were led to believe that there would be some definitive agreement to be announced and that we would generally be pleased," Solomon said. "These steps are onesy-twosy cost-cutting measures.

"These are things they should have been doing 12 to 18 months ago," Solomon added. Standard & Poor's also put Cablevision's debt on Credit Watch with negative implications, citing liquidity concerns.

Cablevision's stock price fell 26 percent, or $2.03, at one point Thursday, to a six-year low of $5.81, before ending the day at $6.60, down $1.24.

Cablevision slid further Friday, losing $1, to $5.60, in early trading.


At the meeting at New York's Waldorf-Astoria Hotel, James Dolan's opening statement was somewhat poignant.

"It doesn't seem like that long ago that the focus was on high-growth, high-return businesses, lots of new interest and lots of capital," he said. "Things have clearly changed. Now it's about disciplined growth. Now it's about risk aversion.

"To go from one to the other is not something that can be done necessarily overnight. It's almost a culture change at the company."

Analysts peg Cablevision's 2003 funding shortfall at $550 million to $1 billion. Cuts will address much of that, but some think more assets sales will be needed.

Cutting $350 million to $450 million in capital expenditures; saving $70 million by closing money-losing The Wiz stores; trimming $60 million from overhead; and shaving $60 million off the Lightpath telecom subsidiary's budget works out to about $740 million.

On top of that will come whatever Cablevision gets from selling Clearview and from buying fewer Sony boxes.


Nonetheless, according to Moody's, Cablevision's moves seem to "fall considerably short of fully addressing our concerns about the finding shortfall, which we contend still remains."

Selling Clearview won't bring in much, Moody's said, because potential buyers are having their own financial difficulties. And Cablevision hasn't addressed News Corp.'s December "put" rights for interests in Rainbow Media's five regional sports networks.

Cablevision vice chairman Bill Bell said he expected Cablevision and News to reach some agreement before the put rights are exercised, leading some analysts to believe News could swap its 40 percent stake in Madison Square Garden Network for full control of the regionals.

Solomon said that might no longer be an option, and said News values the regional sports networks at about $1 billion.

"We think News Corp. will be looking for some cash component in a transaction and that the put right will be exercised," he said, estimating that cash component would be about $200 million.


It certainly seemed possible that a Rainbow asset sale would be in the mix. The Dolans helped fuel that speculation by announcing last Monday that Cablevision would recapture Rainbow's 17-month-old RMG tracking stock, giving holders 1.19 shares of Cablevision for every RMG share they own.

Cablevision's tender offer for the Rainbow tracker, which has traded as high as $29.06 per share, works out to about $9.60 apiece — a discount to the Aug. 2 closing price of $9.90. RMG closed at $7.70 last Thursday, down $1.70.

Some analysts think Rainbow — which includes American Movie Classics, Bravo, Independent Film Channel, WE: Women's Entertainment, MuchMusic USA and interests in the five regional sports networks — could sell for $3.5 billion, more than enough to fill Cablevision's 2003 gap.

SunTrust Robinson Humphrey cable analyst Gary Farber said Cablevision might still sell networks, a point Bell himself conceded. But it's unclear who might pay the Dolans' asking price, or when.

Cablevision also said its revenue rose about 1 percent in the second quarter, to $1.07 billion from $1.06 billion. It lost about 10,000 basic subscribers in the period, while operating cash flow rose 16 percent.