Has Cablevision hung out a “for sale” sign?
With the announcement last week that the cable operator plans to spin off its satellite and entertainment cable channels into a separate company, Wall Street is betting the remaining cable systems are being primped for a possible sale sometime next year.
Indeed, given that Charles Dolan is expected to oversee the satellite spinoff while his son James is left to run the cable business, observers say a major roadblock to a sale will be removed, particularly given the sense among many who watch Cablevision that James Dolan is less passionate than his father about running the company.
“A major impediment [to a sale of Cablevision] has been Chuck Dolan,” said Richard Greenfield, an analyst at Fulcrum Global Partners. “I can see Jimmy trading this [company] if there’s a good offer.”
A spokesman for Cablevision declined comment on speculation about a sale, or anything else beyond what was in the official announcement about the split of the company.
The cable operator on Thursday amended its plan to spin off its satellite unit, saying now that it will combine its satellite business with cable channels AMC, WE: Women’s Entertainment and Independent Film Channel to create a new company that would be run by the senior Mr. Dolan.
Cablevision, meanwhile, would retain the cable systems, its high-speed data service, Madison Square Garden and its sports teams, Radio City Music Hall, the music channel Fuse and Rainbow Media’s stakes in regional sports teams. Further, in an apparent about-face, Cablevision said it will retain its movie theater chain Clearview Cinemas, which had previously been slated to go with the spinoff.
With 3 million subscribers in what many analysts consider the most attractive market in the United States, suburban New York City, Cablevision has long been seen as an acquisition target, particularly given the push among players in the cable industry to get bigger in order to wring out efficiencies and achieve enough scale to command lower fees from programmers.
However, some analysts and investors have fretted in recent months that Cablevision’s big-dollar foray into satellite might hurt the operator’s chances for a sale-particularly since many on Wall Street have questioned the wisdom of Cablevision launching a satellite business.
But if the cable systems are soon free and clear of the satellite business, many expect talk of a sale of those cable systems to resume.
“My focus has been on the core cable business, and my biggest concern has been how DBS is going to be funded,” said Ted Henderson, an analyst at Stifel Nicolaus in Denver. “DBS is a speculative launch and you never know how much it will cost to keep it going, and we don’t know what the revenues are going to be. By spinning off the satellite business, they are letting investors decide which they want to invest in.”
Analysts say the most likely candidates to step up with a bid for the cable systems are the No. 1 and No. 2 players in the space, Comcast and Time Warner.
Time Warner has long had an interest in Cablevision’s assets, given its presence in New York City. Acquiring Cablevision’s systems in surrounding communities would lock up the entire New York metropolitan area-a very lucrative asset to own. Analysts note that the company appears poised to generate from its assets the kind of cash flow it might need to make a play for Cablevision.
Furthermore, Time Warner’s management made clear last week during its third-quarter earnings call that once it firms up some weakening businesses and further pays down debt, it is keen to expand the company’s cable footprint. But management added that nothing can be done until it unwinds several partnerships the cable unit has with Comcast, including joint ventures in Kansas City and Texas as well as Comcast’s 21 percent stake in Time Warner Cable.
“We like the cable business, and feel it has fairly predictable revenue and bottom-line growth,” said Don Logan, chairman of Time Warner’s media and communications group, in a conference call. “It’s an area we would like to expand downstream when we can turn the telescope around from strengthening the balance sheet.”
Comcast, meanwhile, is nearing completion of its integration of last year’s acquisition of AT&T Broadband and is seen as producing significant cash flow from its cable systems with which to acquire more properties to achieve even more critical mass.
“The cable industry is absolutely moving toward another round of consolidation,” said Stifel Nicolaus’ Mr. Henderson. “We are moving forward in a broadband world where competition requires more scale than 3 million subscribers provides you.”
A Time Warner spokeswoman and a Comcast spokesman each declined to comment.
Despite the possibility that Cablevision is readying a sale of its cable systems, a few people familiar with the company said they don’t believe James Dolan is in any rush to sell. For starters, Cablevision said it is on track to be cash flow positive in 2004, which could remove pressure to make a move.
Despite some questions about James Dolan’s ability to run the company like his father did, some onlookers praise him. “I would say that the more we’ve gotten to know Jim, the more impressed we are by how he has managed the company,” said Steven Rattner, managing principal of Quandrangle Capital Partners. Still, Rattner’s firm last week cashed out its $75 million investment in Cablevision following news of the company’s plan to spin off its satellite business. The company offered no public explanation for the move.
Another wrinkle to a quick sale could be the Securities and Exchange Commission probe into Cablevision’s accounting practices. Some analysts suggest that if the investigation persists, it could delay the company’s ability to separate out the cable channels, which are the focus of the SEC inquiry.
The company said the spinoff would continue to be structured as a tax-free pro-rata transaction to Cablevision shareholders, who would get shares in the new company based on their current ownership stakes. Plans call for the two entities to begin operating as separate companies at the start of the year.
At that time, the satellite unit will begin funding itself based on the cash flow and borrowing capacity of its assets. Cablevision added that it would cancel the $450 million it previously committed to contribute to the spinoff.
Cablevision said the three entertainment channels are expected to enter into financing arrangements to help fund and operate the satellite business and to repay $321 million in Rainbow debt plus the $250 million note issued in connection with Rainbow’s purchase of MGM’s 20 percent stake in the three channels.
The three channels will also hand Cablevision $75 million in cash and provide a payment-in-kind preferred security valued at $350 million at the time of the spinoff.
John Motavalli contributed to this report.