Privacy Suits the Dolans

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The latest attempt by a “super-controlled” cable company to take itself private appears likely to succeed, even though the two biggest U.S. MSOs might love to buy Cablevision Systems Corp.’s assets for themselves.

Cablevision chairman Charles Dolan — seeing an in-vogue method of exploiting his “undervalued” company and possibly also of divorcing himself, business-wise, from CEO son James Dolan — made a $7.9 billion bid on June 19 to buy out public shareholders in the sixth-biggest U.S. cable company.

The public shareholders have 80% of Cablevision’s equity, but Charles Dolan, through supervoting shares, has 71% voting power — and told Cablevision’s board in a June 19 letter he only wanted to discuss this privatization deal, not a potential sale of the company.

That’s a big reason why analysts last week said Comcast Corp. and Time Warner Inc. — and other potentially interested parties — were unlikely to try to force Cablevision’s board of directors into taking an offer better than what the Dolan Family Group offered: $21 per Class-A share in cash and a stake in the Rainbow Media Holdings group valued at $12.50 per share. (See related story about Rainbow.)

The proposed setup would have Charles Dolan as chairman of the cable company and its CEO would be Thomas Rutledge, the current head of cable operations. James Dolan, currently the combined company’s CEO, would oversee Rainbow as chairman and CEO.

Time Warner Cable has 1.4 million customers in the New York City metropolitan area and has spoken openly about wanting Cablevision’s 3 million customers in the region. Comcast Corp. also likes the assets.

But those two also are seeking approval of a deal to divide Adelphia Communications Corp.’s cable systems between them, a deal that puts Comcast close to the 30% limit of the pay TV universe federal regulators have imposed on cable companies. (That limit was thrown out in court in 2001, but the Federal Communications Commission has begun a new rulemaking proceeding on the issue, in light of the Adelphia sale.)

Analysts, including Ray Katz of Bear Stearns & Co., pointed out the overriding importance of the Adelphia acquisition to Comcast. Through the joint purchase of Adelphia, Comcast also gets out of the Time Warner Enterprises partnership, something it’s obligated to do by November 2007.

Comcast has “an extra special reason to get that done,” so it wouldn’t want to potentially raise alarms among deal approvers, Katz told clients during a conference call last week.

Time Warner, Katz added, “also has skin in that game.”

From Adelphia and Comcast (through some swaps), Time Warner will be adding 3.5 million subscribers, rising to 14.4 million, and will take a leading position in the Los Angeles market, among others.

Maybe most important, Charles Dolan could always sell the cable company after taking it private, or his heirs could do so after his death. A potential buyer might not want to do battle with Dolan over this deal and pay the price later when Cablevision’s owner is ready to sell.

In the letter to Cablevision’s board, the Dolan group said the family wasn’t interested in selling its stake in Cablevision and only wants to discuss the privatization offer. (Charles Dolan controls all of the Class-B supervoting shares, directly or through agreements with other family members to vote in unison, Katz said on the call.)

The other widely held opinion last week was that the Dolans will have to make a more compelling offer before winning the blessing of the three-independent-director committee formed last week to review the bid. (Cablevision didn’t name the three.)

COX COMPARISONS

Analogies were made to the Cox Enterprises offer to buy out the public’s minority stake in Cox Communications Inc. last year. That $8.5 billion deal got done after Cox Enterprises raised its offer by the equivalent of one times annual cash flow. (The offer started out around $8 billion.)

The Dolans made an offer comparable to the first Cox bid in terms of cash-flow multiples, analysts said.

Insight Communications Co. co-founders Sidney Knafel and Michael Willner are also attempting to buy out public holders and take their 1.3 million-customer MSO private.

Strategic explanations were offered as to why the Dolans would want to gain freedom from having to worry about how various strategic moves might affect the stock price, increased competition from regional Bell operating companies being chief among them.

But Katz said that underestimates the impact of Charles Dolan’s having lost a boardroom squabble over continuing Rainbow’s Voom direct-broadcast satellite-TV venture. Dolan couldn’t persuade the board — including his son, James — to continue funding Voom, so it was shut down and Cablevision’s satellite assets sold to EchoStar Communications Corp.

That stung the elder Dolan, who replaced three members of the board who opposed him, bringing in, among others, Liberty Media Corp. chairman John Malone. Malone left the Cablevision board in early June, “to avoid any potential concerns that could arise” in that both Cablevision and Liberty “own programming companies.” That ignited speculation that Rainbow asset sales might be in the works.

“I think the whole Voom situation had a lot to do with this for Charles Dolan the individual,” Katz said.

Especially in light of what happened there, it could be difficult for Dolan to swallow the kinds of limitations he would need to accept in order to get private-equity investors into the deal. But Katz said in a note to clients last Tuesday that Bear Stearns thinks “the credit markets are skeptical about Mr. Dolan’s ability to raise $4.25 billion public debt at 9.0 times leverage to get the deal done,” so some private equity or third-party financing vehicle might be required.

That’s especially true if Dolan needs to pay more to get it done. Katz said sweetening the deal to a full “Cox-like multiple” would add $3.90 to the $21 cash portion. (He estimates the bump could be $2 to $3.) Merrill Lynch & Co. and Bank of America are putting up the cash portion of the offer: Cablevision secured an interim from them in the amount of $4.25 billion.

THE DEBT IMPACT

While going private could give Cablevision strategic maneuverability, the additional debt being taken on to finance the deal concerned some analysts. UBS Securities LLC analyst Aryeh Bourkoff, who didn’t change his ratings of Cablevision’s debt, estimated the leverage would rise to 8.8-times annual cash flow, up from a 5.5 multiple currently, as a result of $4.6 billion in new debt (to a total of $12.5 billion).

Bourkoff last week drew the Cox analogy and said it was possible the cable portion of the deal would need to be sweetened beyond the $21 per share in cash. To get there, Cablevision might choose to sell a Rainbow asset, he said, rather than add more debt.

Given James Dolan’s interest in Madison Square Garden and its teams and related sports networks, a programming asset seemed more likely to go, Bourkoff said.

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