Dolan Scheme Draws Wall Street Scorn

Nov 3, 2003  •  Post A Comment

Many of the risks and reservations Wall Street has fixed to Cablevision Systems’ latest restructuring plan will likely come to pass if logic and experience count for anything. But the one factor that has been lost in the shuffle, and to which more credence should be given, is Charles Dolan’s unfailing entrepreneurial spirit.
In these days of corporate cost mandates and company lines, there is a scarcity of entrepreneurism, a commodity that has been key in building media (think Road Runner, the 24-hour Cable News Network and even the Full Service Network).
But at Cablevision especially, Mr. Dolan’s entrepreneurial gambles have generated some big losses and setbacks. They carry especially big risks now, given Cablevision’s recent precarious finances.
On the surface, Cablevision’s complex new blueprint would appear to be more panning for gold. Mr. Dolan will be chairman and chief executive of a newly spun-off Rainbow DBS, which will include the company’s upstart satellite and high-definition ventures in addition to the Rainbow cable networks, whose cash flow and borrowing leverage will be used to fund the new businesses.
That’s the first big risk. At a time when cable networks are being bought and sold at a premium, Cablevision is mortgaging the future of its scandal-rocked cable networks, which include American Movie Classics, Independent Film Channel, WE: Women’s Entertainment and stakes in the Fox Sports Net regional networks.
Intent on using the cable networks to pursue other objectives, Cablevision recently was prepared to contribute Rainbow to Edgar Bronfman Jr.’s failed bid for Vivendi Universal Entertainment.
Now Rainbow’s estimated $2.4 billion in assets and estimated $280 million in annual cash flow and borrowing power will be used to fund a satellite business that Cablevision concedes will cost many times the nearly $500 million investment it already has made in the venture. There’s concern the new businesses could completely erode the networks’ value and financially compromise Cablevision’s choice East Coast cable systems. Those systems will be preserved separately along with other location-based assets (such as Madison Square Garden, pro sports teams the New York Knicks, the New York Rangers and the New York Liberty, along with Radio City Music Hall) in separate corporate entity overseen by Jim Dolan, Mr. Dolan’s son and Cablevision’s CEO, in whom Wall Street has expressed little confidence.
Both entities still will be owned and essentially controlled by the senior Mr. Dolan, whose family controls the voting stock and 26 percent of the common stock. It still all flows through the same pockets.
While the cable systems could be sold during the next 18 months to likely rival bidders Time Warner Cable and Comcast Corp. for some premium to the existing $4,250-per-subscriber valuation Cablevision now commands, many on Wall Street are betting the Dolans will hold out for more-something closer to the $6,000-plus per subscriber they privately have mentioned as a price target.
Experts said they might actually be able to get there in inside of three or four years, when Internet Protocol telephony has passed 15 percent market penetration and is generating hefty tri-service bundled profits.
But in the time it takes to achieve that threshold, Cablevision could bet and lose a fortune.
A cable systems sale, when it finally comes, will be complicated by ongoing accounting investigations by the Securities and Exchange Commission and other agencies dogging Time Warner and Cablevision, Comcast’s efforts to monetize its 21 percent stake in Time Warner Cable and plans to publicly spin off Time Warner Cable and Cablevision’s Rainbow DBS.
There is well-grounded Wall Street skepticism that the satellite effort, especially, may go the same costly, failed way as other of Charles Dolan’s past risky efforts, further straining the company’s finances.
Only a year ago, Cablevision, which was supposed to be free cash flow-positive in 2004, barely averted a financial shortfall by selling assets, refinancing and reshuffling expenses. It closed The Wiz retail stores, sold its PCS licenses and wireless entity and sold its Bravo channel to NBC after collapsing its equity partnership in the cable network with NBC and MGM.
Cablevision still has nearly $8 billion in debt that exceeds its $6 billion market capitalization. While its stock price has tripled during the past year, it tumbled more than 13 percent in immediate response to Cablevision’s most recent restructuring plan (there have been at least two others in the past year). Terms and conditions of any part of these complex deals, with banks and other lenders, could further compromise the company’s balance sheet and shareholder interests, analysts said.
Wall Street is uneasy about Cablevision’s eagerness to roll the dice again when it knows it never can be more than a secondary satellite player whose fledgling assets will eventually be absorbed by DirecTV or EchoStar Communications or by players such as Comcast and Viacom seeking a marginal distribution play.
The Voom high-definition business just launched-Chuck Dolan said it was “jump-starting the era of HDTV”-while having more promising prospects, must rely on marketplace acceptance and timing to be profitable. Analysts have assigned a zero value to the new entity, unable to determine what if any cash flow it can generate, and seeing only a high liquidity risk. Mr. Dolan has been unable to find partners to defray costs, which are nominal compared with the $6 billion Cablevision spent to upgrade systems.
Rainbow DBS represents an open-ended financial commitment for Cablevision, in the face of the cost to keep its services competitive by converting Rainbow channels to an MPEG4 format next year (from MPEG2) to increase capacity, or extending its retail alliances beyond just Sears.
“Chuck has rarely been wrong about these things, even when it appeared he was betting the ranch,” said a high-level executive close to the Dolans. “If he’s half right, here, he’s got one hell of an asset.”
The Dolans, who declined to comment, will likely speak about the changes in a Nov. 11 earnings call.
Leading industry analysts insist there are more negatives than positives in the new restructuring and overriding uncertainties about protecting and growing shareholder value.
The Wall Street response generally was similar to that of Prudential Securities analyst Katherine Styponias, who immediately downgraded Cablevision stock, expressing dismay that management was willing to jeopardize, if not destroy, shareholder value to meet its own strategic and financial goals.
Lara Warner of Credit Suisse First Boston downgraded Cablevision to “underperform,” saying the new game “will ultimately prove to be a value-destroying action.” Other Wall Street response has been as swift and severe.
“The decision underscores the company’s willingness to compromise minority shareholder interests in favor of entrepreneurial whims of the Dolan family,” said Bernstein Research analyst Tom Wolzien. “Investors are likely to view the new entity as extremely speculative despite the highly attractive programming assets, since net cash flows of the combined entities are likely to be minimal or negative.”
The Dolans received an immediate thumbs-down on their new blueprint from The Quadrangle Group late last week, which immediately exercised its option to cash out its original $75 million investment in Cablevision several years ago. That investment is now valued at about $114 million, sources said.
That action has been widely interpreted as a “vote of no confidence,” even though Quadrangle managing partner Steven Rattner, who declined comment on the move, will remain on the Cablevision board of directors. That’s not exactly a ringing endorsement from an insider.