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Just how serious are the Dolans?

Sep 23, 2002  •  Post A Comment

While the controlling Dolan family is sending the strongest signals yet that it is ready to discuss selling its choice East Coast cable systems to an eager buyer such as AOL Time Warner, don’t expect a deal soon.
Founding chairman Charles Dolan and his son James Dolan, the chief executive, have said for years they will sell at the right price. That price still appears to be higher than anyone-especially AOL Time Warner-is able or willing to pay.
That makes the Dolans’ latest public pitch look to savvy investors like a red herring-an effort to reassure shareholders of Cablevision’s ability to offset a looming $600 million to $1 billion funding gap atop $7.5 billion in debt. That effort has backfired and only intensified questions about the company’s ability to meet its targets and generate sufficient cash flow to avoid major dismantling.
“There’s nothing new here. Chuck [Dolan] has always said anything in his company is for sale at the right price. But he never has been able to reconcile his sense of value with reality. I think it’s just a head fake to the shareholders,” said one high-level veteran cable executive who asked not to be identified.
Word on the street
The Dolans know that AOL Time Warner-the most logical premium buyer because of its own companion New York cable systems-is in no position to buy right now. Its internal management restructuring and turmoil not withstanding, AOL Time Warner simply doesn’t have the cash and balance sheet flexibility to pay the $12 billion to $14 billion Cablevision wants for its 3 million subscribers, or between $4,000 and $4,600 per subscriber.
AOL Time Warner must wait until a recovering stock market allows for a pure cable system spinoff and the deal currency promised out of the recent Time Warner Entertainment partnership settlement, which suggests Time Warner’s systems are worth a more modest $3,100 to $3,500 per subscriber.
Together, Cablevision and Time Warner cable systems would create a nearly $50 billion pure-cable behemoth with more than 14 million subscribers.
Unfortunately for Cablevision, Standard & Poor’s isn’t buying it either. Cablevision’s stock rose 8 percent Sept. 16 on the Dolans’ renewed sales pitch, only to decline when Standard & Poor’s downgraded the company’s corporate credit rating. S&P said it is concerned about the loss of 17,000 subscribers to competitive satellite providers over Cablevision’s refusal to carry New York Yankees baseball games at a cost of $2 per subscriber and the company’s general inability to grow cash flow from its cable services. S&P pointed out that only 1.4 percent of Cablevision’s subscribers are the more lucrative digital customers, the company’s having backed off an exclusive set-top box pact with Sony and aggressive new service rollout plans. Not growing new business cash flow fast enough could lead to another funding crisis late next year.
Leading industry analysts also aren’t buying it. Merrill Lynch analyst Jessica Reif Cohen warns that barring significant asset sales Cablevision will remain focused on saving cash and reducing expenses rather than on long-term growth prospects for its businesses.
Ms. Cohen said last week that things won’t be much better in 2003, when she projects a $530 million free cash flow loss for Cablevision-an estimated deficit from operations that is more than $200 million more than management’s forecast-and a lingering funding gap of at least $408 million, barring asset sales or tapping $365 million in cash resources available from its Rainbow Media Group.
Ms. Cohen also cites significant discrepancies in Cablevision’s high-speed data growth projections-nearly twice the industry average. “We still do not feel comfortable with management’s assumptions, which in some areas appear aggressive and inconsistent,” she said.
Cablevision’s proposed funding shortfall solutions so far have been defensive: It closed 26 of its Wiz stores, cut $500 million in telecom and cable capital expenditures, reduced headcount by 7 percent and froze salaries after reporting two consecutive quarters of net losses.
View more cloudy than clear
Its Clearview Cinemas (valued at between $50 million and $75 million) and its wireless and personal communications systems licenses (valued at about $900 million) are for sale. It risks losing its DBS licenses without additional financing or a strategic equity partner before a March 2003 launch.
Some question the Dolans’ true intentions, saying that privately they have been peddling Rainbow Group cable networks, collectively valued at between $3.5 billion and $4 billion, only to flatly reject $1 billion-plus offers selectively made for some of the services by Rainbow partners NBC and MGM, high-level sources confirmed. “NBC and MGM are basically offering 50 cents on the dollar,” a source said. NBC and MGM declined comment while the Dolans said publicly they want to hold on to Cablevision’s Madison Square Garden (valued at about $1 billion), its cable networks, Rainbow Media Group, its sports franchises and its stake in Fox Sports’ regional operations.
The latter is another little-understood financial time bomb. Rupert Murdoch’s Fox Sports has the year-end right to exercise a “put call” as part of Mr. Murdoch’s joint sports program venture that could require Cablevision to pay more than $1 billion in cash, stock and notes for Fox’s 40 percent stake. Sources said Mr. Murdoch wants to acquire Cablevision’s 60 percent.
In fact, Cablevision’s own financial state could become more precarious in the wake of increasing scrutiny of public company finances -particularly at those companies closely held by founding families.
A closer look
Investors and analysts want to know how and why it is that Cablevision has a $1 billion funding gap and is falling far short of its original system upgrade and new services rollout targets.
Specifically, analysts said they are concerned about hundreds of millions of dollars collectively invested and capitalized rather than expensed over the years in direct satellite, wireless and other business interests that have gone nowhere. Many of these fruitless investments and other of its business dealings have involved companies (from program producers to aircraft entities) that are owned or operated by family members, according to published reports.
The irony is that if AOL Time Warner or any other interested buyer ever takes the Dolans seriously about selling, a due diligence check would likely revea l more about where money has gone in the areas of new business research and development, system upgrades and new services. Adelphia Communications’ alleged use of company funds for personal matters and the misreporting of subscribers and other accounting issues mean stricter reviews for all media companies.
“The worst a closer scrutiny might reveal is simply that they always haven’t been the most astute business managers,” said a high-level cable executive.
A cable system merger with or sale to Time Warner may be Cablevision’s best solution, if AOL Time Warner survives the current government regulatory probe of its online accounting practices and the redesign and relaunch of its online businesses.
Accepting Time Warner Cable stock would give the Dolans a graceful exit as pioneer cable operators, providing them with a sizeable stake in the second-largest cable operator in the United States and a continuing hand in the cable business without the headaches and expenses. Since the Dolans have 75 percent control of the board votes, and even with only a 24 percent hold on Cablevision’s stock, there is no one around to pressure them to do otherwise.
The key question is how long can the Dolans and their investors hold on?
Even its largest nonfamily shareholder, Gabelli & Co., said some assets must go, warning that in a no-growth scenario “the gap widens further.”
“In a less volatile world, the company would be able to easily roll this over,” Gabelli said in a recent report, acknowledging Cablevision’s claim that it will be free cash flow positive in 2004. “However, in today’s funding climate, we are
unsure it will be a simple process.”