Sales Talk Pumps Up Cablevision

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Cablevision Systems Corp. stock reached its highest point in nearly three years last Wednesday, fueled by strong fourth-quarter operating results and continued speculation that the company’s cable systems could be put up for sale.

Cablevision stock was priced at $30.30 in 4 p.m. trading on Feb. 23, up $2.25, or 8%. Earlier that day it had hit $30.70.

Cablevision last traded around $30 in April 2002.

Speculation has been high that Cablevision could sell its cable operations in light of the decision to sell the struggling Rainbow DBS operations and an announcement last Tuesday that it would restructure its regional sports networks with partner News Corp.

DBS UNIT NEEDS CASH

Cablevision agreed to sell Rainbow DBS’s satellite assets to EchoStar Communications Corp. last month for $200 million. And it cut a deal earlier this month to sell the remaining Rainbow DBS assets to Cablevision chairman Charles Dolan, who essentially agreed to assume liabilities.

Several analysts have speculated that unloading Rainbow DBS, marketed under the Voom brand, and cleaning up the regional sports networks could be precursors to an outright sale of the cable systems and the Rainbow Media Holdings programming services.

But selling either or both might not be necessary to fund Voom, which some analysts have said needs $1 billion to $1.5 billion over the next few years. An outright sale of the MSO could fetch as much as $15 billion; Rainbow has been valued at $3.5 billion to $3.8 billion.

DOLANS COULD RAISE CASH

Lehman Bros. cable and satellite analyst Vijay Jayant thinks Charles Dolan and other family members involved in the transaction could fund Voom by selling some Cablevision stock back to the MSO in a forward transaction.

Alternatively, Cablevision could use its substantial cash position to buy part of the family’s stock.

“In any event, the prospect of a higher share price until Feb. 28 (by when the Dolan family needs to enter into a definitive agreement with Cablevision) would make it easier for them to raise funding to consummate the Voom deal and potentially eliminate the immediate impetus to sell the business, in our view,” Jayant wrote in a report.

NOT RULED OUT

Cablevision CEO James Dolan wouldn’t talk about specific plans, but didn’t rule out the possibility of a sale of the MSO.

“With the exiting from the DBS business, we have a great deal of confidence in our ability to operate successfully all of the businesses under the Cablevision umbrella,” Dolan told analysts during a conference call to discuss results.

“We think they all have bright futures. That does not preclude our ability to do a transaction that would bring even more value to our shareholders.”

Dolan took a similar tack when asked whether Cablevision would seek to sell the Rainbow networks: “We really don’t have plans at this time to sell the Rainbow networks. We continue to explore strategic potential for them that could involve that, but there are no plans at this time.”

Operationally, Cablevision reported strong basic subscriber growth in the fourth quarter, adding a net 10,788 basic customers.

The Bethpage, N.Y.-based MSO also had strong new-services additions — digital subscribers rose 145,933, high-speed data customers were up by 93,517 and digital telephone customers increased by 83,497 during the quarter.

It was the cable company’s third consecutive quarter of basic-subscriber growth.

Cablevision continued to show strong growth in new services, but isn’t focused on getting digital video recorders into customer homes.

NETWORKED DVR PLANS

Cablevision makes DVRs available (for $9.95 per month) to customers who ask for them. But president and chief operating officer Tom Rutledge is looking ahead to network-based stored-video services and won’t market DVRs aggressively.

“We do think that the DVR is an inelegant solution to recording programming and that could be done on a network basis more efficiently and would make all of our existing boxes backward-compatible,” Rutledge said. “If there are reasons why we need to go the DVR route in order to grow our business, we’ll do so and are pursuing that, but at the same time we’re pursuing a [networked] DVR option as well.”

Overall, revenue in the quarter rose 11%, to $1.4 billion, and adjusted operating cash flow rose 5%, to 261.4 million.

Consolidated results were hit by losses at Rainbow DBS, which reported a $449.8-million operating loss and a $190-million adjusted operating cash flow deficit in the quarter.

Cable revenue rose 14%, to $773.5 million, and adjusted operating cash flow was up 20%, to $304 million.

RAINBOW GAINS

At Rainbow Media Networks — which encompasses AMC, WE: Women’s Entertainment, the Independent Film Channel and regional sports networks — pro forma revenue rose 6%, to $214 million, and adjusted operating cash flow rose 90%, to $95.9 million.

Cablevision said it expects cable subscribers to grow 1.5% to 2% in 2005, with revenue and adjusted operating cash flow rising at mid-teens percentages for the year.

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