Did General Electric Co. and NBC offer Cablevision Systems a better way out of its $1 billion funding jam?
When the matter was briefly raised last week at Cablevision’s first in-person investors meeting in New York, Cablevision executives dismissed it with a simple “No.” Top NBC executives, vacationing late last week, couldn’t be reached for comment. But high-level executives close to the companies insist Cablevision recently rejected overtures by NBC and its corporate parent, GE, to infuse the cable operator with cash in exchange for a bigger stake in or complete ownership of Rainbow Media Group, in which NBC has a fully diluted 34 percent ownership stake.
When an attendee asked about the matter during the Aug. 8 meeting, Cablevision Vice Chairman Bill Bell dismissed it without discussion, although he left open the possibility that Rainbow eventually could be sold. Sources close to the companies say that while they have discussed such a deal before, the timing now is critical. The Rainbow cable networks-Bravo, American Movie Classics, Independent Film Channel and Women’s Entertainment-are viewed by Cablevision as assets to monetize to ease its financial crunch, while NBC views Rainbow as a collection of scarce services it could own and improve.
For now, Cablevision clearly is resisting the sale of Rainbow to NBC, 20 percent owner MGM, or other interested suitors such as Viacom, News Corp. or The Walt Disney Co. Cablevision’s board of directors earlier last week announced it would exchange 1.19 shares of Cablevision stock for each outstanding share of Rainbow tracking stock. The move will result in a fall in the value of Cablevision’s already battered stock for its existing shareholders, although it will give the company access to several hundred million dollars of Rainbow’s reserves and the power to sell the assets at the best price. MGM has the right to participate on a pro rata basis in any third-party sale of Rainbow, which is valued at between $3.4 billion and $4.4 billion. If NBC converts all of its Rainbow shares under the buyback, it could wind up with a 13 percent ownership stake in Cablevision.
Restructuring announced
Founding Chairman Charles Dolan and President and CEO Jim Dolan also announced a restructuring to close a $1 billion funding gap that calls for a 7 percent work-force reduction, cutting more than $60 million in overhead costs. The plan also includes closing 26 unprofitable Wiz electronics stores in the East, selling the Clearview Cinema chain and reducing by half Cablevision’s annual capital expenditures, which primarily represent system upgrades. Cablevision also will seek a partner or a buyer for its wireless business. Senior managers will go without cash bonuses or salary increases in 2002.
Cablevision officials declined to provide investors and analysts, when asked, to detail their total investments in losing start-up businesses as direct broadcast satellite and PCS licenses, which analysts expected them to sell.
Wall Street investors expressed their displeasure with what Cablevision called its “growth plan,” forcing Cablevision’s already depressed stock down some 16 percent to close at $6.60 a share Aug. 8. Moody’s Investors Service responded by downgrading the bond ratings for CSC Holdings and its Cablevision subsidiary, and is reviewing for possible additional downgrades, “principally reflecting lingering concerns about the company’s perceived funding shortfall as expected to occur in 2003.”
More than a half-dozen leading cable analysts downgraded Cablevision stock Friday over concerns the company will collapse into a financial crisis without more dramatic measures and more candid disclosures.
Standard & Poor’s recently placed Cablevision Systems ratings on a negative watch due to heightened concerns about “the company’s liquidity and business position.” The agency said Cablevision’s rollout of digital television services has been “very limited,” and its ability to “rapidly ramp up this business … remains unclear.” Cablevision said last week its basic subscribers will decline by 1 percent this year instead of growing by that much, and conceded it cannot recoup the 17,000 subscribers it lost in the first half of 2002 to DirecTV over its Yankees baseball dispute with the YES Network.
Cablevision Systems’ decision to close a $1 billion funding gap without major asset sales or raising additional funding surprised many on Wall Street, some of whom say it only postpones the inevitable.
If the economy and consumer response to its New York-area services don’t dramatically decline, Cablevision officials contend their company should realize free cash flow by 2004.
Cablevision reported a second-quarter net loss of $98.2 million compared with a $238.5 million year-earlier profit, which included a $745 million gain from the sale of its 20 percent stake in four cable channels. Weaker advertising and the loss of Yankees baseball also contributed to last quarter’s loss. Revenue rose 2 percent to $1.07 billion, weaker than analysts expected.