Dolans Must Decide Which Price Is Right


Chuck and Jim Dolan have a decision to make. The father and son duo — chairman and CEO, respectively, of Cablevision Systems — will now have to raise their offer to outside investors who hold stock in the company to at least $30 per share, according to some Wall Street analysts.

That’s because stock in Cablevision is already trading above the $27-per-share price that the Dolans offered on Oct. 8, in their bid to take the company private.

Shares of the company’s stock traded at $27.70 each as of Oct. 26. Though analysts said earlier this month that the Dolans could raise their bid to between $29 and $30 per share to get the deal done, the higher point of that range now seems to be the new minimum.

Whether the Dolans would be willing to up that offer remains to be seen.

The Dolans’ $27-per-share offer amounts to about $19.2 billion — $7.9 billion in cash and the assumption of $11.3 billion in debt. Increasing that offer to $30 per share would boost the cash portion of the deal to about $8.8 billion, an increase of $900 million.

Taking on another $900 million in debt will put the company dangerously close to violating its loan covenants, which stipulate that the company’s debt cannot be more than nine times its cash flow.

As it currently stands, the $27 offer would bring Bethpage, N.Y.-based Cablevision’s leverage to about 9.14 times second-quarter 2006 cash flow, according to Citigroup media analyst Jason Bazinet.

The Dolans could reduce the debt by using $637 million in cash they received when a special dividend was paid to all Cablevision shareholders earlier this year. In a research report earlier this month, Bazinet said applying the $637 million in cash to the deal brings the leverage down to 8.8 times cash flow.

The Dolans have already said in public filings that they plan to fund the privatization bid through a series of syndicated loans and debt issuances totaling about $11 billion. About $8 billion of that money would be used to fund the cash portion of the deal; the rest would go toward servicing some of the debt.

That $3 billion would be used to refinance existing debt, not retire it, said Janco Partners analyst Matt Harrigan. While that could restrain the Dolans from increasing their offer significantly, there could be enough room to increase the offer to $30 per share.

“It’s hard for me to see how they can take the price up above $30 [per share] without running into some real trouble with the debt covenants,” Harrigan said. “The only way they could work it out so that they could pay a bigger premium is if they sold Rainbow. Their incentive to do that is zero, because it would just effectively increase the price that they’re able to pay.”

Rainbow Media Holdings, the Cablevision unit that includes national programming networks AMC, IFC and WE; the Madison Square Garden arena and sports teams; and interests in two regional sports networks, has long been believed to be on the block. But most analysts believe the Dolans will hold off on selling the networks for a simple reason: Once the company goes private, all the proceeds of a Rainbow sale would go to the family, rather than be split with shareholders.

In a research report earlier this month, Bazinet valued Cablevision’s non-cable system assets at about $5.5 billion, with the bulk of that ($4 billion) attributed to AMC, IFC and WE. He valued Madison Square Garden at about $1.5 billion.

“That’s the safety valve,” Harrigan said of the Rainbow assets. “If they did have to increase the price to $32-ish, they would have to do something with Rainbow.”

Harrigan believes that while the Dolans may harbor a desire to sell off the programming assets, they will resist at least until the privatization deal is completed.

“I would suspect that they push the leverage as high as they can without selling very much and take it private,” Harrigan said. “Once you get it private, you do something with Rainbow and get the leverage down to a saner number.”

Miller Tabak & Co. media analyst David Joyce also believes that the Dolans will wait until after the company goes private before selling the Rainbow assets. He also believes the family can get a deal done below $30 per share.

“I don’t think that the market is going to be a driver at this point,” Joyce said. “The market can’t force the Dolans to bring [the bid] up, but I think the market does reflect that the Dolans will bring it up somewhat. They can bring it up to where the market is right now and it’s still above their $27 offer. Thirty would be a stretch.”

<p>Gold at the End of the Rainbow?</p><p>Selling off assets of the Rainbow Media Holdings subsidiary could help the Dolans take Cablevision Systems private: </p>

AMC, IFC, WE networks *

$3.744 billion

Madison Square Garden and teams *

$1.541 billion

Other networks (Fuse, News 12, Metro Channels)

$299 million


$5.584 billion