Dolans: Stay or Go?


Speculation concerning the possible sale of Cablevision Systems Corp. heated up once again, after company chairman Charles Dolan told a national newspaper that a sale was not out of the question.

Although talk about a possible sale of Cablevision has been circulating for years, Dolan's comments in last Monday's TheNew York Times
appeared to be more serious than in the past.

"We're not in love with our assets," Dolan told the Times. "And at a point when you have brought a service to maturity, it could very well be the time to monetize it so you can do something else. And I don't think we resist that process."

Dolan added that a sale to AOL Time Warner Inc. — which has more than 1 million Time Warner Cable subscribers in Manhattan (and is encircled by Cablevision's 3 million customers in the New York metropolitan area) — would be attractive.

"The reason Time Warner constantly comes up is: Hey, we're doing exactly the same thing in the same market," Dolan said. "It is artificially divided. We ought to be doing more together. And I hope we will … And I hope [Cablevision CEO] Jim [Dolan] works something out because I think those two should be combined in some way."

Cablevision declined to comment further on the article.

Divided Views

Analysts appeared split on whether Dolan was seriously willing to sell the cable systems.

Granted, Dolan has said similar things in the past — mostly that Cablevision is for sale at the right price — and has never followed through. But what makes some analysts believe that Dolan may be more open to a deal with AOL Time Warner is that for the first time in years, Cablevision is under pressure to raise money.

Cablevision faces a $1 billion funding gap in 2003, and in August it outlined a plan that included shuttering 17 of its 42 The Wiz electronics stores, selling off its Clearview Cinemas theater chain, laying off about 1,500 workers and other cost-cutting measures. The MSO also said it was evaluating its Northcoast Communications Inc. subsidiary — which has wireless telephone licenses in New York and Boston — and could possibly sell it.

Adding to the likelihood that Northcoast could be sold is a recent Federal Communications Commission proposal to release wireless carriers from their obligation to buy about $16 billion in wireless spectrum from NextWave Telecom Inc.

In a research report, Credit Suisse First Boston Corp. cable analyst Lara Warner said removing that obligation would free about $8 billion from Verizon Communications Inc. alone, the most likely buyer of the Northcoast spectrum.

Northcoast currently has about 10 megahertz of spectrum in Boston and New York — two markets that would be particularly attractive to Verizon.

She added that Cablevision could sell Northcoast for between $500 million and $700 million, wiping out a large chunk of its expected $1 billion 2003 funding gap.

Plausible Timing

According to one source in the financial community, those factors — coupled with AOL Time Warner's plan to spin off its cable properties in a separate publicly traded company next year, as part of the restructuring of Time Warner Entertainment L.P. — make the timing right for a Cablevision sale.

"Sooner or later he [Dolan] was going to have to sell," the source in the financial community said. "But all of the things might be coming together at the right time. He [Dolan] sounded a lot more serious this time."

The source added that the Time Warner Cable IPO could present an opportunity for Dolan to combine Cablevision with those assets and receive a large portion of stock in return. A combined Time Warner Cable and Cablevision would have nearly 14 million subscribers.

But valuing the spun-off TWC could be tricky. In its announcement of the Time Warner Entertainment L.P. restructuring, AOL Time Warner valued AT&T Comcast Corp.'s 21 percent stake of a new TWC at $5.4 billion, implying the entire cable unit was worth about $26 billion — or roughly $2,400 per subscriber. Using that same valuation, a combined Time Warner-Cablevision, with 13.8 million subscribers would be worth about $33.1 billion.

AOL Time Warner has said that it would retain about 79 percent of Time Warner, with AT&T Comcast's 21 percent expected to eventually be sold. Even if AOL Time Warner agreed to reduce its holdings in TWC to 51 percent, that would leave Cablevision with a 28 percent stake worth about $9.3 billion.

Given its current stock price of $10.46 per share, Cablevision has an enterprise value (price times outstanding shares plus debt plus preferred stock minus non-cable assets minus options exercised) of $6.1 billion. Divide that by 3 million subscribers, and Cablevision's enterprise value per subscriber is about $2,000.

While that would appear to make a deal with Time Warner attractive, it also reflects how the cable market has hit near-historic lows. And, according to one analyst, selling in today's volatile market would be a major mistake.

"The market for cable-television asset sales is no better than the market for PCS asset sales or content asset sales," Stifel, Nicolaus & Co. Inc. cable analyst Ted Henderson said. "The capital markets are pretty much shut down and that to me is not a good market to be selling assets in."

Recovery period

Further cable consolidation wouldn't take place until at least 2005, when cable stocks have had a chance to recover and cable operators have at least a year of positive free cash flow under their belts, Henderson estimated.

Goldman Sachs & Co. analyst Richard Greenfield would not speculate on the possibility that Cablevision would sell its cable properties, but added that the MSO has more pressing issues before it.

Greenfield estimates Cablevision will still fall between $200 million and $300 million short of bridging its funding gap even after its August initiatives are complete.

"We still believe in the underlying value of the cable systems and that there is substantial asset value there," Greenfield said. "We just still believe there is a funding gap. Even to get to that number, its still confusing for us to see these non-core investments which we just don't understand conceptually."

Instead of selling off cable, Cablevision could divest its Northcoast holdings or its direct-broadcast satellite venture, Greenfield added.

"It seems like they have relatively simple ways to address the funding gap, and they don't seem to be doing that," Greenfield said.

DBS pitch to FCC

Analysts have hoped for months that Cablevision would scrap the DBS venture and in August, the MSO said the venture would cost between $500,000 and $2 billion. But Cablevision is making noises about launching the service in March 2003, according to documents filed with the FCC last week.

Cablevision executives made a presentation before FCC officials on Sept. 17, mapping out further details of the planned March launch of a spot-beam satellite for the service, and asking the commission to require EchoStar Communications Corp. to transfer 17 satellite transponders to Cablevision as a condition of its pending merger with DirecTV Inc.

The additional 17 transponders, once added to Cablevision's existing 13, would give the service — called HD-SAT — capacity for about 276 channels. It would also give HD-SAT national coverage, making it available in 210 markets as opposed to the 143 the service could presently reach.

That wider coverage area would make the service a more formidable competitor against a combined EchoStar-DirecTV.

But EchoStar spokesman Marc Lumpkin said that his company has its own uses for the transponders — high-definition television service, interactive television, local-into-local TV channels and high-speed data service.